Slow decision-making in the government and stretched payment cycles in the construction industry expected to pull down earnings
Construction industry players have indicated that sluggishness in on-ground execution will continue, according to a recent IDFC Securities report. The key bottlenecks include slow decision-making in the government and stretched payment cycles.
Working-capital levels have been stubbornly high, leading to a continued rise in debt levels in Q2FY12. There has been a visible slowdown in order flows from the power sector even as ongoing projects face the risk of an execution slowdown. A rise in debt levels and borrowing rates would drive interest provisioning higher than earlier estimates. Lowered earnings of L&T by about 4% each for FY12 and FY13 have been indicated in the report. The earnings estimate for HCC will factor in incremental concerns on execution, and the company may suffer a net loss of Rs15.80 crore for the quarter (from break-even earlier).
A likely peaking of interest rates and fund-raising through divestment of infrastructure assets are the key potential triggers for stocks in the near term. The outperformers in the industry include L&T, IVRCL, HCC and NCC, and Simplex is expected to be above average due to its relatively rich valuations.
Order inflows have been muted across construction companies, due to slower order intake from the industrial & power segments. Orders from Central/state government authorities in areas like urban infrastructure, water, etc, have been hit by slow decision-making in the government. Also, power-sector orders have decelerated due to uncertainty over availability/pricing of fuel and higher borrowing costs. Orders from the building (mainly government & institutional) and road segments have been relatively robust.
Overall, announced orders flows for EPC players (including BTG) have grown by 7% y-o-y (year-on-year) in H1FY12. Excluding orders flows from NTPC’s bulk tenders (9x800MW), order flows have declined by 12% y-o-y to Rs86,800 crore.
Uncertainty on availability/pricing of fuel has already led to a visible slowdown in power sector orders. Orders from the power sector (generation + T&D, or transmission & distribution) declined by 31% y-o-y to Rs331 billion YTD (year-to-date), but were up 9% y-o-y to Rs5,250 crore, including NTPC bulk tenders. With these uncertainties likely to persist in the near term, execution of under-construction projects (especially projects in early stages) may get stretched due to deferrals by clients, says the report. Further, difficulty in raising equity-funding for under-construction projects may also decelerate the execution of these projects.
Working capital levels remain stubbornly high. There has been no tangible improvement in the previous quarter. The payment cycle of government and PSU (Public Sector Unit) contracts remains stretched due to slow decision-making.
Borrowings rates for sub-contractors and suppliers have increased to about 15% due to the continued rise in interest rates, rendering market borrowings unviable. Construction companies have also had to increase support to their sub-contractors and suppliers to ensure continuity of execution. As a result, there has been a further rise in debt levels of most construction companies. Borrowing rates have risen further and are now at 11.5%-12% for most players in the segment.
“We had 12 rounds of rate revisions since March 2010 to control inflation. But inflation is still above comfort level. Though it has affected the production adversely,” RBI governor D Subbarao told reporters after the RBI’s Central Board meeting in Jaipur
Jaipur: Admitting that a series of rate hike has affected the industrial activities, the Reserve Bank of India (RBI) on Thursday said inflation continues to remain above comfort level, reports PTI.
“We had 12 rounds of rate revisions since March 2010 to control inflation. But inflation is still above comfort level. Though it has affected the production adversely,” RBI governor D Subbarao told reporters after the RBI’s Central Board meet here.
RBI has increased interest rate by 350 basis points since March, 2010 in its bid to tame inflation. The central bank is due to review the monetary policy on 25th October.
“We have to weigh growth, inflation and factors affecting the economy of our country,” Mr Subbarao said.
Headline inflation was 9.78% in August, which is much above the comfort level of the RBI of 5%-6%.
Pace of industrial output in the country has remained subdued in July and August, which may impact the country’s GDP growth of the second quarter.
Industry has been asking the central bank to pause rate hikes saying high cost of credit was affecting economic activities.
On depreciation of rupee against dollar, Mr Subbarao said weakening of the Indian currency was making imports costlier.
“Recently the global prices of crude have come down, but due to depreciation rupee price of crude oil on net basis has gone up by 3%,” the Governor said. India imports about 80% of its crude oil requirements.
Oil imports during April-August this fiscal were valued at $52.251 billion, 27.09% higher than $41.114 billion in the corresponding period last year.
“Kingfisher is on cash-and-carry. We had payments from the airline (to cover for aviation turbine fuel sales) till this morning. They did not make any payments, thereafter, so supplies have been cut at all major airports,” an HPCL official said
New Delhi: State-owned oil marketing company Hindustan Petroleum Corporation (HPCL) on Thursday suspended jet fuel sales to Kingfisher Airlines after the private airline failed to pay up for its fuel purchases, reports PTI.
“Kingfisher is on cash-and-carry. We had payments from the airline (to cover for aviation turbine fuel sales) till this morning. They did not make any payments, thereafter, so supplies have been cut at all major airports,” said a company official.
HPCL sells some Rs7-Rs8 crore worth of jet fuel or ATF to Vijay Mallya-owned airline. Kingfisher, which had run an outstanding debt of Rs634 crore, was last year put on cash and carry. It pays cheque for day's purchase of ATF after which HPCL refuels its aircrafts.
But the airline had not paid anything for purchases made on Thursday and those to be made on Friday.
“Kingfisher’s outstanding (debt) is covered by a bank guarantee of Rs550 crore and a corporate guarantee of Rs200 crore. But they have to pay to buy fuel which they haven’t and so further supply was cut,” the official said.
No immediate comment was available from Kingfisher.