[T.S.R:16710] India Construction: Neither Too Late To Exit Nor For Shorting; Sell L&T, Gammon, HCC, IVRCL

India Construction-Not Too Late Exit

With order inflow nowhere close to last year's numbers, onus should now shift from bagging orders to execution, especially road BOTs. Higher D/Ex,  negative cash flows and damp ROEs have increased the need for equity dilution at parent or SPV levels. Sell L&T, Punj LLoyd, Patel Engineering, HCC, Nagarjuna and IVRCL.

 

Order pipeline in future lacks visibility: The sector currently in focus is Roads, where NHAI is expected to announce large ticket orders close to Rs250bn in Q4FY11. Also, order inflow gap of nearly 31% till YTDFY11 needs to fill up, with incremental orders from Hydrocarbons and Water segments. Power capex is also now expected to go slow, with land‐related issues, financing issues and health of SEBs. Thus, the risk of ending the year with a negative order inflow for our E&C universe looks very much possible. 

Order inflow needs to catch up in Q4FY11:

E&C order inflow has slowed down in Q2‐Q3FY11 on account of lack of order announcements from almost all  sectors. Based on the BSE data on order awards, order inflows de‐grew by 23% QoQ and 12% YoY in Q3FY11. Same was the case in Q2FY11, where de‐growth was 17.1% QoQ and 28% YoY. In ‐house road BOTs, power and international projects were the main drivers for the order book growth. If the guidance of  companies (15‐20% growth in order inflow YoY for FY11) has to be met, order inflow is still short of projects worth Rs500bn (order inflow to the tune of  Rs350bn would however be required to achieve a flat YoY growth).  

Similarly, excluding L&T, our universe is short of orders worth Rs142bn. Also, sectoral composition in the overall inflow has changed, with roads and power gaining share and hydrocarbon and water losing share. 

In‐house orders are and will remain crucial: With a spree of NHAI projects awarded in 2008‐09, construction players have included in‐house BOT projects in the parent order book in FY10 andFY11E. In‐house orders for construction players (PL E&C universe) have increased, from Rs91bn in FY10 to Rs155bn in YTDFY11 on account of large BOT roads projects won by IVRCL. L&T has also increased its in‐house order booking from Rs14bn to Rs101bn, comprising 28% of the total projects won in H1FY11 on account of Power and Road projects.

Major contributors to third‐party projects in YTDFY11: Power was the main sector which saw healthy order inflow with a considerable high base effect, primarily on account of higher hydro power projects to HCC and L&T's large order intakes in the space of BTG/BOP projects. Apart from that, international projects, buildings and industrial capex also saw a growth which helps in faster order book churning. Project awarding from the Water sector continued to experience woes on account of financial/political crisis in AP, environmental crisis in MP and rejig of tenders in Gujarat.
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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