CONSTRUCTION COMPANIES-Solid prospects
Current order books of most of the larger players are healthy enough to sustain the growth tempo in the next year
Notwithstanding the current over all recessionary trend, companies engaged in civil construction have put up an impressive performance. Thanks to the better order books, their sales growth has improved markedly. Although turnover has improved, operating margins have been under stress lately due to more competition. All players have voiced similar views - that competition has never been so intense. Advances from customers are not easy to come by and they are not always interest-free. However, in some of the projects, payments have been on time and the client is also keen on timely execution of projects (like in the case of fly-overs in Mumbai which are being financed by the Maharashtra State Road Development Corporation). Besides the reduced margins, interest costs, too, have been on the higher side. Though the rate of interest has come down a little, the risks associated with long-gestation projects in the construction industry raise the cost of funds. With margins under pressure, industry players seek to bag as many orders as possible, so that a higher turnover would partly offset the negative effect. Though getting orders in not a problem at present, the flow of funds should not subside in the coming periods. Industry players are apprehensive of the contradictory signals from the finance ministry. Given the finance minister's current fixation with controlling fiscal deficit, construction players fear the effect this could have on infrastructure spending. But no one doubts the construction industry's long-term prospects. Opines Abhijit Rajan, managing director, Gammon India, 'Lack of adequate infrastructure has been identified as a major hurdle to the sustained economic development of our country. The investment required to create this infrastructure is extremely large and beyond the savings generated by our country. This necessitates the involvement of foreign capital.' The more the required finances get delayed, the higher would be the resultant growth, whenever it materialises.
Cognisant of this fact, domestic players are preparing for the future. They are building on their equipment base, and also, in some cases, tying up with foreign majors to bid for large projects. Though, compared to foreign companies, Indian majors in the construction industry are equally good when it comes to design and project execution capabilities, they lack the expertise for large projects being contemplated by the government. States Pravin Sood, general manager (finance), Hindustan Construction Company (HCC), 'Projects of such large proportions have not been commissioned earlier and one has to tie up with foreign players to pre-qualify for these projects.' Incidentally, HCC (which has an enviable track record of executing projects worth over Rs 30,000 cr till date) has entered into an MoU with Bechtel, Hyundai, Samsung, etc. for joint bidding of projects in the future.
Apart from experience, foreign players have better financial muscle. Their deeper pockets enable them to invest substantially in a long-term project, where the pay-back period may stretch to almost a decade, and where commercial and political risks are huge. On the other hand, investments turned sour in one project could jeopardise the very existence of a medium-sized Indian company. In the coming years, many projects would be on BOT or BOOT basis, with foreign players increasing their presence in the country. The sooner the government announces a clear-cut policy framework and takes concrete steps to mitigate risks, the earlier would the investments start flowing in. In the absence of this, construction players will continue to talk of a promising future and fight for their share of business in the present.
Hindustan Construction Company-HCC
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Construction major HCC has reported an improved performance for the first-half 9812. It has clocked an over 100% rise in turnover to Rs 255.21 cr, including its share of Rs 54.33 cr (9712: Rs 30.44 cr) from the ongoing Nathpa Jhakri Joint Venture (NJJV) project.
In fact, the turnover would have been higher but for the extended monsoons this year which affected some of the company's ongoing projects. HCC has several projects under execution, including the Rs 194-cr Mumbai-Pune expressway, the Rs 192-cr concrete spillway for the Gosikhurd project in Maharashtra, the Rs 186-cr breakwater at Ennore, Tamil Nadu, and the Rs 114-cr Kurichu concrete dam in Bhutan.This year, the company bagged two projects, worth Rs 460 cr, in the 1020-MW Tata hydroelectric project at Bhutan which is being funded by the government of India. As of Jun.'98, HCC's order book stood at Rs 1,540 cr, including Rs 300 cr of the NJJV order.
HCC's OPM has improved slightly in the first half, from 11.4% to 13.2%, mainly because of a higher turnover. However, interest costs continue to remain high, increasing by 68% to Rs 16.77 cr during the first half, and eating away almost two-thirds of the company's operating profit. ' This has happened because we have invested heavily in building our equipment base over the past two years, as the nature of the jobs becomes more varied,' informs Pravin Sood. Though advances from customers are roughly about 15-20% of the project cost, the company still has to invest substantially to procure the required machinery. In the current year, HCC has invested close to Rs 50 cr in equipment. For the two new projects bagged during the year, it will have to invest another Rs 100 cr for machinery. However, HCC has arranged an interest-free loan from its client according to Sood, and thus it would not have to incur any major additional interest cost. As a percentage to sales, Sood aims at controlling the interest cost to about 7-8%.
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Hindustan Construction Company
Higher turnover to improve profit margins in future
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9812(3) Var.(%) 9812 (6) Var. (%) 9806 (12) Var. (%)
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Total sales 160.09 107 255.21 102 375.64 21
Share in NJJV 30.57 50 54.33 78 74.96 10
Sales (-NJJV) 129.52 127 200.89 110 300.68 23
OPM (%)# 12.7 13.2 13.7
Operat. profit 16.49 144 26.43 142 41.17 35
Interest 10.38 194 16.77 103 24.22 40
Gross profit 6.11 89 9.65 927 16.95 27
Depreciation 3.68 21 6.72 15 11.88 29
Tax 0.35 - 0.35 - 0.75 -10
Net Profit 2.08 1039 2.58 LP 4.32 33
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Figures in Rs cr # on sales (-NJJV) Source: Capitaline Ole
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HCC's 9812 net profit at Rs 2.58 cr (compared to the Rs 4.91 cr loss in 9712) includes about Rs 1 cr arising from the payment of Rs 6.5 cr from the UP government against an earlier claim (this is not extraordinary in nature). For the current year, HCC is certain of clocking a turnover in excess of Rs 500 cr. The NJJV project has been given an extension and would be completed in the year 2002. With the real estate market showing no signs of revival, HCC has not made much headway in its proposed plans for developing its properties in Mumbai. None of the other projects are held up because of any major hurdle. Last year, HCC's second half was quite impressive. In 9906, barring unforeseen events, it should record a net profit of about Rs 11 cr, resulting in an EPS of Rs 5.5. At the current market price of Rs 22, this is discounted merely 4 times, and one should invest for gains in the medium-to-long term.
Gammon India
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With a backlog of Rs 850 cr in orders, construction major Gammon India does not seem to have been affected by the sluggish economy at present. For the nine-month period ending 9812, it has clocked a turnover of Rs 201.15 cr, a surge of about 51% over that for the previous corresponding period. Operating profit, at Rs 19.14 cr, is higher by 19%, and net profit has risen handsomely by 48% to Rs 7.66 cr. Net profit has already surpassed the previous full year's figure of Rs 7.01 cr.
Besides ECC (L&T's construction arm) and HCC, Gammon is one of the most successful companies in the construction industry. This year's strong growth was possible because of its ability to secure new orders. Traditionally, the company has been more active in the construction of dams, hydel power stations, chimneys and cooling towers. But lately, it has bagged substantial orders for roads and fly-overs. Currently, it has work going on for about 45 projects in India, apart from one each in Bhutan and Nepal. It is involved in the construction of 18 fly-overs in the metros (totalling 30 km) at present. Some of the major projects bagged during the current year include the Rs 58-cr J J Hospital Palton Road bridge, the Rs 45-cr Srisailam project, the Rs 22-cr cancer hospital at Mumbai and flyover bridges in Delhi (Rs 42 cr) and Madras (Rs 28 cr). The other major projects currently being executed are the Rs 75-cr Alamatti dam, the Rs 50-cr Kurichu power house, the Rs 50-cr Ranganadi dam, the Rs 42-cr Sion fly-over in Mumbai and the Rs 35-cr Delhi-Noida bridge.
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Gammon India
Large order book to sustain growth
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9812(3) Var.(%) 9812 (9) Var. (%) 9803 (12) Var. (%)
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Sales 90.93 79 201.15 51 215.66 20
OPM (%) 8.9 9.5 10.0
Operat. Profit 8.09 32 19.14 19 21.54 35
Interest 1.63 -9 5.18 -6 7.47 6
Gross Profit 6.46 49 13.96 32 14.07 58
Depreciation 1.26 26 3.55 16 3.91 8
Tax 1.25 8 2.75 17 3.15 350
Net Profit 3.95 80 7.66 48 7.01 54
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Figures in Rs cr Source: Capitaline Ole
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The company was in the news in the recent past because of the attempted takeover by Manu Chabbria. His stake was bought by the present managing director, Abhijit Rajan, eventually, and since then, Gammon has stressed more on its business, striving to improve the quantum of work as well as quality.
The company's turnover has surged from Rs 81.61 cr in 9303 to Rs 215.66 cr in 9803(CAGR: 21%) and net profit has risen from Rs 2.37 cr to Rs 7.01 cr (CAGR: 24%) during the same period. It has earned a reputation for quality work and timely completion of projects. Notably, for the Mankhurd-Vashi bridge, which was scheduled to be commissioned in Mar.'99, Gammon has finished the work four months ahead of the scheduled 17 months, and has earned itself a bonus of Rs 1 cr from the government. It is also involved in three other fly-overs in Mumbai city and expects to complete them on schedule.
Gammon had come out with a Rs 17.31-cr 2:1 rights issue in Aug.'98, offering shares at a premium of Rs 30. The issue was completed in two tranches and fully subscribed. The proceeds were to be invested in capital expenditure (Rs 7.15 cr) and meant for investments in a subsidiary, Gammon Infrastructure. Informs S Chakraborty, senior vice president, infrastructure, 'The subsidiary was incorporated with a view to invest in BOT projects, which, when they materialise, would require hefty sums as investments.' However, the company is yet to involve itself in any BOT project and has utilised the money raised by the rights issue for procuring machinery. Capital expenditure during the current year would add up to about Rs 10 cr, and more money could be invested in machinery, depending on the size and nature of the new orders. Gammon has four other subsidiaries, but their operations are insignificant and Gammon's exposure to them is only about Rs 4-5 cr.
Gammon has been able to secure new orders worth about Rs 280 cr during the current year, and P K Umrigar, vice president, finance, is hopeful of ending the year with orders in hand worth about Rs 1,000 cr. This is expected to keep the company fairly busy for the next couple of years, and Umrigar is confident that Gammon will maintain a growth of over 20% on a Y-to-Y basis. Growth in the short term should come from execution of orders for roads and fly-overs. These projects have a smaller gestation period of about 15-18 months. The second half is traditionally better for the company (accounting for about 60% of the turnover) as the work on dams and hydel projects is held up during the monsoons. For 9903, Gammon should report a turnover of Rs 275 cr and net profit of Rs 9.75 cr. On the post-rights fully-diluted equity of Rs 6.49 cr, the EPS works out to Rs 15.0, which is discounted 6.5 times at the current market price. With good medium-term prospects, one can buy at declines.
Petron Engg. Construction
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Meanwhile, another industry player, Petron Engineering Construction, has reported a turnover of Rs 45.36 cr for the first-quarter 9812. Operating profit stands at Rs 6.20 cr, while OPM is at 13.7%. The company's net profit for the first quarter is Rs 2.64 cr.
Although corresponding figures for the previous year are not available, Petron's current performance is in line with the earlier full year 9809's impressive show - it had clocked sales of Rs 164.25 cr and a net profit of Rs 9.18 cr.
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Petron Engineering Construction
Growing at a healthy rate
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9812(3) 9809 (12) Var. (%) 9803(6) Var. (%)
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Sales 45.36 164.25 37 64.59 7
OPM (%) 13.7 13.5 10.3
Operat. Profit 6.20 21.92 16 6.66 -18
Interest 0.86 4.28 4 1.96 -10
Gross Profit 5.34 17.64 21 4.70 -21
Depreciation 1.45 5.10 20 2.41 11
Tax 1.25 3.36 5 0.20 -79
Net Profit 2.64 9.18 28 2.09 -26
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Figures in Rs cr Source: Capitaline Ole
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Petron (in which the promoters hold a 69% stake)has executed several projects, mainly for customers in the oil and refinery, cement, steel and fertiliser industries. After going public in Mar.'95, when it mobilised funds for increasing its asset base and re-locating its fabrication facilities, the company has shown a consistent performance. Since 9609, total income has increased from Rs 98.86 cr to Rs 164.25 cr in two years (CAGR : 29%), while net profit has increased from Rs 6.1 cr to Rs 9.18 cr (CAGR : 23%). Last year, Petron bagged orders worth Rs 167 cr, including those of MRPL (Mangalore), Essar (Jamnagar), BPCL (Mumbai), IOC, Panipat, IOC, Mathura and IOC, Vadodara. In 9809, apart from the construction division, Petron's other divisions - rockwool, mechanical, petrofab and Highway Inn resort - also performed satisfactorily.
The total receipts of Rs 164.25 cr in 9809 included Rs 20.94 cr from the sale of trading items (9709: Rs 3.81 cr). But the traded items are none other than those supplied to its clients for contracts under execution. The company has written off bad debts of about Rs 2.07 cr (nil). In 9809, Petron's interest costs were under control. They rose a mere 4% to Rs 4.28 cr, and the company has lowered its debt from Rs 14.54 cr to Rs 11.73 cr. Its net cash generation from operating activities was about Rs 10.64 cr (Rs 5.94 cr) and it ended the year with a net cash addition of Rs 2.30 cr (Rs 0.49 cr).
Capital Market had recommended Petron at Rs 16, and the scrip has since risen to about Rs 60; it is currently ruling at about Rs 43. At the current price, Petron's 9809 actual EPS (Rs 12.2) is discounted 3.5 times. As of Dec.'98, the company had an order book of Rs 180 cr. It has changed its accounting year now and would be declaring six-month results in March'99. The projected (and annualised) EPS for 9903, Rs 14.8, is discounted 2.9 times at the current market price. The scrip is also trading at a discount to its latest book value of about Rs 61. Keeping in view the company's previous track record of timely and efficient execution of projects and the construction industry's long-term prospects, one should stay invested.
The golden quadrilateral
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In the report submitted to the government, the task force on infrastructure development has suggested that the government should first concentrate on improving the mobility along the golden quadrilateral - the national highways joining the metros of New Delhi, Mumbai, Chennai and Calcutta.
This is because, though the national and state highways account for a mere 10% of the entire road length, they carry 75% of the traffic. With density of traffic increasing consistently, especially along the golden quadrilateral, the government should give priority to widening these corridors so as to avoid congestion and improve mobility.
Shifting priority from providing accessibility to new areas, to better mobility on the existing highways is also justified by the investments required for creating a complete infrastructure. The government's total plan expenditure for the roads sector, at about Rs 13,000 cr in the Eighth Plan, falls way short of the massive sum required to provide full connectivity and build expressways. Even four-laning of the golden quadrilateral, about 6,000 km, would require Rs 18,000-24,000 cr. Thus, in the near-to-medium term, the focus should be more on four-laning of the existing network.
Reasoning that the over all economic returns associated with road development are substantially higher, ie, the increase in over all economic efficiency and productivity, development of surrounding areas and the rise in adjoining land values it will bring about, the task force suggests that the government should play a leading role in creating road infrastructure.
In the same breadth, the task force also exhorts the government to provide the necessary policy framework and fiscal incentives to attract the participation of the private sector. It wants the National Highway Authority of India (NHAI) to be the sole regulator and facilitator for inviting bids for the improvement or construction of national highways. Road projects should be awarded and implemented through special purpose vehicles (SPVs), either state-owned or in the private/joint sector.
(Courtesy:CMOT) |
