The past has not been good and the future does not seem too bright either.
The infrastructure pack has gained over 11 per cent since the start of 2012, against five per cent for the Nifty, on expectations of a rate cut by the central bank, providing much needed impetus for the sector.
Analysts aren’t expecting any fireworks in the December 2011 quarter results, which has been traditionally strong for infra companies, as profitability is expected to remain under pressure. Analysts believe even the March 2012 quarter is likely to continue this. Thus, valuations, which have improved somewhat recently, will remain under pressure. Though lower inflation and rate cuts would be good news for the sector, policy reforms will be a bigger trigger.
For the December quarter, the sales growth for a universe of 30 companies (top 10 players each in construction, capital goods and power sector), at 17 per cent year-on-year is not going to disappoint, despite the slowdown. Power companies (41 per cent of total revenues) will benefit from robust demand, capacity additions and better merchant realisations.
Construction and capital goods companies, each forming around 30 per cent of the total, are sitting on healthy order books. Compared to earlier quarters, sales growth is expected to be lower due to execution bottlenecks, rising interest rates, policy paralysis and payment delays by clients.
The operating profit growth of power and capital goods companies is expected to be under more pressure than in construction companies. Lower coal availability will affect NTPC’s operating profit growth, which forms 45 per cent and 41 per cent of power sector revenues and operating profit, respectively. An adverse revenue mix and a relatively higher proportion of fixed contracts, amid high input cost scenario will affect the operating margin of capital goods players.
However, construction companies are expected to lead in the net profit decline due to an increase in average interest cost to sales ratio by over 500 basis points and working capital intensity. In terms of individual companies, Larsen & Toubro is expected to be the best performer. Though its expected sales growth of 15 per cent is lower than BHEL’s 17 per cent, the fall in margin should be the lowest. While L&T is among the top picks of analysts, the outlook on BHEL (due to competition, slowing orders) and NTPC remains negative.
The outlook for the entire sector also continues to be bearish. Says Amit Mahawar, analyst, Edelweiss Securities, “Except roads and power transmission and distribution, we do not see any major traction in orders.”
Road infra companies like IL&FS Transportation and IRB, as well as KEC, are better placed. Order inflow has been healthy and the momentum is expected to continue.
