Performance Progress

Construction players riding on infrastructure growth

With acceleration in infrastructure activity in the past two to three years, the construction sector, after a long period of slowdown, has benefited a great deal. As a result, the profitability of some construction companies has also improved.

Indian Infrastructure analyses the annual financial performance of 15 construction companies selected on the basis of market capitalisation and diversified presence in the infrastructure space. These include Larsen & Toubro (L&T), IRB Infrastructure Developers Limited, NCC Limited, Sadbhav Engineering Limited, Ashoka Buildcon Limited, Gayatri Projects Limited, KNR Constructions Limited, ITD Cementation India Limited and Hindustan Construction Company [HCC] Limited. While most of these companies are engineering, procurement and construction (EPC) players, many of them have also forayed into the infrastructure development space.

Financial performance

Income and expenditure

With regard to the total income of the 15 selected companies, the aggregate revenue for the year 2017-18 was Rs 1,875.68 billion as compared to Rs 1,828.68 billion in 2016-17, registering an increase of 2.57 per cent. Amongst the companies considered, 10 witnessed a growth in their total income, while the remaining registered a decline in the same. The highest growth was recorded by Gayatri Projects Limited, recording an increase of approximately 36.11 per cent. Further, companies such as Ashoka Buildcon, KNR Constructions, JMC Projects (India) Limited and J. Kumar Infraprojects Limited witnessed a growth of over 15 per cent in their total income. Meanwhile, companies including ITD Cementation, Jaiprakash Associates Limited and Welspun Enterprises Limited registered a steep decline in their total income during the period.

As far as total expenditure is concerned, the companies registered a decline of 1.77 per cent in the aggregate total expenditure incurred during the period, falling from Rs 1,802.54 billion in 2016-17 to Rs 1,770.7 billion in 2017-18. Of the companies under consideration, Jaiprakash Associates recorded the maximum decline of around 50 per cent in the total expenditure incurred during the period. However, companies such as Ashoka Buildcon, Gayatri Projects and J. Kumar Infraprojects recorded a steep rise in their total expenditure.

Analysing the half-yearly performance for the year 2018-19, these companies have registered an increase of 17.21 per cent in total income and 7.22 per cent in total expenditure. NCC Limited showed an increase of nearly 54.2 per cent in its total income and 46.09 per cent in its total expenditure for the year 2018-19 (till September). Other companies witnessing a similar trend include Ashoka Buildcon, Gayatri Projects and J. Kumar Infraprojects.

Profits

Considering the profit after tax (PAT) of the companies under review, the aggregate net profit has increased sharply by 179.34 per cent, from Rs 38.43 billion in 2016-17 to Rs 107.35 billion in 2017-18. All the companies under consideration have witnessed a substantial growth in net profits, barring Jaiprakash Associates, Simplex Infrastructure and Sriram EPC Limited, which witnessed a decline in profits by about 108 per cent, 16 per cent and 99 per cent respectively. The highest growth was experienced by Gayatri Projects, with net profits rising sharply by approximately 154 per cent. Besides, companies such as KNR Constructions, JMC Projects and ITD Cementation recorded a growth of over 40 per cent in net profits. The trend continued in the April-September period of 2018-19 when most of the players under consideration recorded over 20 per cent growth in net profits.

Order book and capital structure

The order inflow for the companies was quite slow in the first half of 2017-18. However, the pace increased in the second half mainly due to a pick-up in contract awards in the road and power transmission segments.

The order books of the 15 players considered reflect diversified portfolios. During 2017-18, the majority of the companies, including NCC, Sadbhav Engineering and IRB Infrastructure, witnessed a strong growth in their order book position. Meanwhile, companies such as Ashoka Buildcon, KNR Constructions, HCC, Sriram EPC and J. Kumar Infraprojects registered a dip in their order book position.

With regard to the capital structure, although the companies are earning profits, they remained highly debt-laden. As of March 31, 2018, the median debt-to-earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio for these players was as high as 9.43, a slight decline from 10.71 in 2016-17. The ratio is a measure of a company’s creditworthiness. A value above 5 is considered high and becomes a cause for concern for investors and rating agencies. Companies such as IRB Infrastructure, Sadbhav Engineering, HCC, Jaiprakash Associates, JMC Projects and Simplex Infrastructure posted their debt-to-EBITDA ratio above the group’s median.

Outlook

The stocks of many players such as Ashoka Buildcon, IRB Infrastructure, Sadbhav Engineering and KNR Constructions, among others, have been trading at a lower price in January 2019 vis-á-vis the same month of 2018. While some companies have witnessed a continuous decline in stock prices throughout the period (January 2018-January 2019), others showed volatility with stock prices plunging and then picking up. Despite this, industry analysts are bullish on large construction companies due to robust order books and a strong track record of past performance. A healthy pipeline of projects and the fact that orders are being driven by public sector units indicate a positive outlook for the construction sector. Activity is expected to remain buoyant resulting in improved cash flows and earnings visibility in the future.

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