Infra Q4 revenue to decline 6.6% YoY: Motilal Oswal

Sluggish order intake, muted execution and rising interest rates continue to hurt profitability

4QFY12 revenue to decline 6.6% YoY on slow order intake, poor execution: We expect the aggregate revenue of our universe of infrastructure companies to decline 6.6% YoY in 4QFY12 (v/s 1.6% YoY decline in 3QFY12). Normally, infrastructure companies try to book maximum revenues and expenses in the fourth quarter. However, the absence of sizeable flow of fresh orders in FY12, policy paralysis and hardening interest rates impacted execution. Secondly, payment delays by clients also led to muted execution as companies slowed down work on such projects. We expect HCC's revenue to fall by 14.3% YoY, IVRCL's to decline by 14.4% and Gammon India's by 18.1% in 4QFY12. We believe that Simplex Infrastructure would post a slightly improved performance with revenue growing 18% YoY in the quarter on the back of a sizeable order intake in FY12. We expect Nagarjuna Construction to report flat revenue growth (up 1.3% YoY).

Book-to-bill ratio remained flat at 3.4x: Aggregate book-to-bill as at the end of 4QFY12 stood at 3.4x, flat YoY. We believe this ratio would turn out to be one of the key reasons behind tardy execution for the next couple of quarters. In terms of order flows, road and urban infrastructure is the only sector which has seen some traction over the last few quarters. The NHAI had set an aggressive target of ~7,300km worth of projects in FY12. It has awarded 6,491km (falling short by 11%) in FY12. We believe the shortfall is expected to spillover to FY13. Besides this, we expect the momentum in project awards to continue, as there is a ready bank of ~15,000km where critical milestones are being achieved. Unlike other infrastructure segments like airports, power, etc, which are facing regulatory, systemic and resource issues, the roads segment continues to enjoy high visibility of investment activity.

Margins upside capped due to rising interest costs and commodity prices: During 3QFY12, EBITDA margins for most construction companies declined (aggregate margins down 150-200bp) due to (1) execution delays, and (2) increasing commodity prices. In 4QFY12, we expect EBITDA margins to stabilize at 8.5-9%. Given the increase in fixed costs like depreciation and interest, we expect lower profitability.

(Rs in million)

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