See 15% rev growth in construction sector in Q4: PLilladher

Infrastructure sector has rallied during Q4FY12, mainly due to an improvement in the market sentiment and business confidence, 125bps cut in CRR in two tranches easing liquidity worth Rs800bn and expectation on rate cuts in the near term. Going ahead, we believe that the stock performance will depend on 1) improvement in the balance sheet (especially for the construction players, where Balance sheet concern is very high due to poor working capital management and high debt), 2) improvement in order inflows with the softening in competitive intensity, 3) addressing land acquisition issues (especially in the road segment) and 4) few rounds of rate cuts to soften interest rate.

For Q4FY12, we expect companies to report revenue growth of 15.2% YoY; however, PAT will be muted due to higher interest expenses (4-5% as a % of sales in Q4FY12 still). Order inflow announcement remained muted during the quarter. For the overall sector, order inflow stands at Rs295bn (approx) as against Rs385bn (approx) for Q4FY11E.

On the order inflow front, we are expecting a 22.5% YoY de-growth (for our coverage universe), which was mainly on account of lack of Power and Hydrocarbon sector projects. Order inflow for our universe stands at Rs260bn for Q4FY12E as against Rs309bn for Q3FY12. Key developments to watch out for in Q1FY13E are 1) order inflows and competitive scenario 2) operational outlook and 3) fund raising plans in infrastructure asset SPVs.

Roads: So far during FY12, NHAI has awarded 42 projects, totalling 5457km and is in the process of awarding few more projects during the last week of March 2012. It is planning to award additional ~8800km during FY13. However, competitive intensity remained high in the sector. Sadbhav Engineering, IL&FS transport and Gammon Infra are amongst the key developers who have won road BOT projects from NHAI. Total order inflow in roads is Rs76bn.

Power: Orders from the power sector have dried up on account of domestic fuel deficits and poor financial health of State Electricity Boards. Banks/FIs are unwilling to sanction or disburse loans for projects that lack fuel tie-ups. This will delay order inflows from the power generation sector and would also risk the orders from power transmission and distribution space. During the quarter, L&T has booked few orders from the transmission and distribution segment. Total order inflow is Rs35bn.

Hydrocarbon/Process: Order inflows remained weak from this segment due to a slowdown in the capex cycle on the back of tight liquidity and high cost of debt. However, going ahead, the scenario will improve as orders which were deferred in FY12 may spill off, improvement in long-term finances are expected and subsidy scenario would be addressed to. Order inflows are expected to improve from the Middle East and South East Asian markets. Total order inflow is Rs45bn.

Infrastructure: Infrastructure orders continue to show signs of recovery. L&T witnessed order inflows in Factory and Building segment, Water and effluent treatment business and Road EPC works (GVKPIL awarded Rs19.4bn worth orders for the construction of Shivpur - Dewas project). Total order inflow is Rs102bn. Budget is positive for the infrastructure sector in terms of the higher fund allocation for various infrastructure schemes. However, we are yet to witness an improvement on the ground level in terms of land acquisition, higher pace in project awarding, working capital management, skill labors and long-term financing solutions.

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