Reliance Infra lowers expectations from construction business

Company's revenue from construction biz fall 45% during the quarter, due to lack of sufficient orders

Despite the 13.3 per cent drop in consolidated revenues, Reliance Infrastructure reported a strong 76 per cent growth in consolidated net profit during the quarter ended March. The company managed to grow its profits backed by growth in the electricity business and decline in the relatively low-margin construction and engineering, procurement and construction (EPC) business.

Revenue from the construction business fell almost 45 per cent during the quarter, due to lack of sufficient orders. However, the loss of revenue from the construction business was partly compensated by the growth in electricity business. Led by higher rates and volumes, the electricity business registered 33.1 per cent growth in revenue to Rs 3,692 crore. Because of a drop in construction business revenue, the corresponding cost relating to construction material and sub contracting charges fell almost 50 per cent. This had a positive rub-off on the operating margins, which improved to 13.71 per cent in the quarter, compared to 10.4 per cent in the corresponding quarter last year.

  As seen in the earlier quarter and what has been a key worry for the Street, the construction business continues to disappoint. Its order book fell as low as Rs 10,215 crore, against Rs 17,300 crore in the corresponding quarter last year. This is bound to have an impact on revenue. Currently, EPC and construction account for 37 per cent of revenues, as compared to 60 per cent in the year-ago quarter. However, the management is confident of maintaining Rs 7,000-8,000 crore annual revenue over the next two years from the segment and selectively looking for projects in the EPC business.

Any disappointment on this front is likely to be partly addressed by a growth in generation revenues. The management is expecting it to grow in the region of about 15 per cent over the next few years based on the rate and volume growth-driven new customer additions. In FY13, the company added 200,000 customers in its Mumbai and Delhi circles.

Infrastructure has seen traction as 10 road projects will be revenue operational in the current quarter, higher contribution from Delhi Metro and start of Mumbai metro are expected in FY14, but that is still a small 2.5 per cent of the total revenues of the company. The company is expecting Rs 2,000 crore revenue from the infra business in FY15, nine per cent of consolidated revenue of the company in FY13.

Importantly, traction in infra is good news from the cash flow perspective, as this will help in internal cash generation and absorbing the interest costs relating to the projects. Meanwhile, results are ahead of expectations, so there would not be any negative surprises on the earnings front from analysts, as most of them continue to have a 'buy' rating on the stock, considering the attractive valuations. The stock is currently trading at 0.5 times its book value and discounts next year's expected earnings by eight times.