The Hindu Business Line : Strong show by infrastructure cos

BL Research Bureau Infrastructure and construction companies managed strong sales and profit growth for the quarter ended December 2007, though operating profit margins remained flat.

An analysis of 26 companies (excluding Larsen & Toubro, on account of its diversified profile) in this space suggests that they managed sales growth of about 44 per cent each, compared with the same quarter in 2006.

Sales growth

Net profit growth matched sales growth, though tax incidence rose on account of the withdrawal of tax benefits under Section 80IA in the 2007 budget. Operating profit margins for these companies witnessed a mild decline of about 50 basis points to 13 per cent.

Every company in this space, barring Jaiprakash Associates (which witnessed flat sales), managed to grow its topline, with a few such as Punj Lloyd (91 per cent growth on a standalone basis) and IVRCL Infrastructures (85 per cent) reporting stand-out numbers.

In contrast to trends for India Inc as a whole, the quality of income registered improvement, with ‘other income’ making a smaller contribution to the total. Operating profits margins have seen a mild decline, particularly for mid and small-sized companies.

This moderation in margins could probably be explained by a higher proportion of sub-contracted work, as companies coped with a surging order book.

However, the recent trend of big-ticket orders bagged suggests a steady trend in margins from here on.

Most of the companies maintained healthy order flows barring a few such as Gammon India.

The company’s order flows for the nine months ended December declined, relative to the previous year.

Better debt management

While overall interest cost grew higher by 49 per cent in the quarter, most companies managed to maintain their financing costs on a sequential basis.

Interest outgo for the universe increased by a mere 1.3 per cent compared to the September quarter, suggesting better debt management. Interest cost as a percentage of sales also declined sequentially.

Though net profit growth, at 44 per cent, was lower than the December quarter of last year (52 per cent), this should be seen in light of the loss of Section 80 IA tax benefits for some companies in the 2007 budget.

Points to watch

While this analysis is on standalone financials, a good number of companies have been diversifying into new segments such as BOT projects in roads and real estate, through subsidiaries.

Consolidated numbers may, therefore, become more indicative going forward.

Investors also need to watch for any trend of declining operating profit margins over the next few quarters, hinting at a slow down in execution or increasing raw material costs.

Forays into new businesses, with a significantly different return profile such as IVRCL’s foray into oil and gas exploration and Madhucon Projects’ foray into coal mining also need to be watched.

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