Crisil says high interest cost to pinch construction cos
March 17, 2011
Crisil expects financial performance of construction companies to remain subdued over the next two quarters on account of slow execution and rising interest rates.
Crisil Equities' Q3FY11 result analysis of 12 construction companies shows that earnings were adversely impacted by the two factors. While revenue growth was healthy at 18 per cent q-o-q and 28 per cent y-o-y, earnings were muted at 5 per cent q-o-q and one per cent y-o-y. Crisil Equities said that new order inflows during the quarter weakened as project awarding hit a roadblock.
Construction companies' (excluding L&T) order execution slowed in Q3FY11 mainly due to land acquisition issues, and delays in obtaining government approvals, in general, and the Telangana agitation in Andhra Pradesh, in particular. Five companies have projects in this geography.
Though L&T recorded y-o-y revenue growth of 41 per cent, 11 other players logged only 14 per cent despite healthy order books, it said.
Tarun Bhatia, Director, Capital Markets, Crisil Research, said apart from slower execution and higher interest expense, decline in order inflows during the quarter has added to the construction companies' worries. Order inflows slowed down due to delays in the tendering process and sluggish project awarding by the government. Although most of the companies have a healthy order backlog [2.8 times trailing 12-month revenue (TTM)], order inflows declined about 35 per cent q-o-q."
EBITDA margins were stable during the quarter as steel prices remained flat and the marginal increase in cement prices was passed on as most order books have a cost escalation clause. However, earnings were muted on account of high interest expense, which jumped 49 per cent y-o-y and 18 per cent q-o-q. Interest cost as a percentage of sales expanded by 50 basis points y-o-y to 3.5 per cent in Q3FY11. This increase was a culmination of stretched working capital cycle (due to payment delays) and higher borrowing cost following the RBI's monetary tightening.
