Infra: Pressure on earnings to continue says Nirmal Bang

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Infra: Pressure on earnings to continue says Nirmal Bang

Nirmal Bang has come out with its report on infrastructure sector result preview.

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Nirmal Bang has come out with its report on infrastructure sector result preview.

We expect the earnings of companies in the infrastructure sector for the quarter ended September 2011 to remain flat because of suppressed operating margin and higher interest costs. Net sales of companies in our coverage universe are expected to rise 29%YoY, primarily driven by outperformance of companies like GMR Infrastructure, IRB Infrastructure, and Reliance Infrastructure. However, higher revenue growth would be offset by pressure on EBITDA margin and a sharp rise in interest costs. Subsequently net profit would remain flat YoY and decline by 11% QoQ. We believe IRB Infrastructure would outperform with 47% revenue growth and 13% earnings growth.

Revenue growth of 29% to be driven by infrastructure developers' performance: For 2QFY12, we expect the companies in our coverage universe to report revenue growth of 29% YoY, primarily driven by strong performance of infrastructure developers. The strong performance will be on the back of 54% YoY growth of GMR Infrastructure , 47% YoY growth of IRB Infrastructure and 27% YoY growth of Reliance Infrastructure. Pure EPC players - HCC is expected to report a growth of 7% and IVRCL 20% (due to low base in 2QFY11), as seasonally this is the weakest quarter because of the monsoon.

EBITDA margin to be under pressure: EBITDA for our coverage universe is expected to grow by 26% YoY, but EBITDA margin is likely to decline by 50bps to 17.6% because of a rise in commodity prices and increased contribution from the low-margin segments to revenue. The growth in EBITDA is expected to witness contribution to the extent of 44% by GMR Infrastructure (driven by robust performance of its airport vertical), 32% growth of IRB infrastructure (driven by its EPC segment) and 47% from IVRCL because of a low base.

High interest rates to restrain net profit growth: To curb rising inflation, the Reserve Bank of India (RBI) raised its repo rate by 350bps to 8.25% in the past two years, which has increased average interest costs for companies to 11-12% and impacted the sector's profitability. We expect net profit of companies in our coverage universe to remain flat YoY and decline 11% sequentially.

Outlook: For FY13, we expect the infrastructure companies to report an improvement in earnings growth, driven by ongoing concerns waning (slower order inflow, rising interest rates, regulatory issues, delay in project execution) and the low base of FY12. Apart from all this, the current valuation indicates that all risks and concerns have been factored in and the investor sentiment towards the sector is at its lowest level. Hence, we expect a re-rating of the sector. Based on the risk-reward structure, the infrastructure sector provides a good investment opportunity and we maintain our positive view on sector. 
Our estimates vs consensus: Our estimates are broadly in line with consensus expectations, except for HCC and IVRCL. For HCC, net loss would be higher by Rs75mn due to assumption of higher interest costs. For IVRCL, net profit would be higher by Rs97mn, driven by 12.5% higher revenue than consensus estimate.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment