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All is not well for road-construction companies. Weak order flows in a normally robust March quarter, lower-than-expected pace of construction and stretched working capital may take a heavy toll on profit growth in the March quarter.
Infrastructure stocks began their descent after news of weak orders in FY19 (see chart above). Also, the government estimate of 10,000km of roads constructed during the fiscal year is almost 40% lower than the original forecasts.
This is ironical, given that investors expected a ramp-up in order flows in the March quarter before the lull that would set in before and during the general elections. Order flows under the new government will now pick up only in the second half of FY20.
Meanwhile, the ills of land acquisition and funding have resurfaced in the last few months. The situation is better than a decade ago under the hybrid annuity model, but a few projects have been stuck because of last-mile land-acquisition issues. Hence, delays dog the project.
Developers and bankers insist on at least 80% land acquisition before taking the appointed date, which is important in securing advances to kick-start a project and bank funding for execution, says a report by HDFC Securities Ltd.
Dilip Buildcon Ltd has nearly eight projects pending appointed date, while KNR Construction Ltd, PNC Infratech Ltd and IRB Infrastructure Developers Ltd have three each, and Sadbhav Engineering Ltd and Ashoka Buildcon Ltd, four each.
These delays have led to holdups in advances, which in turn is reflected in higher working capital required across the sector. The financial sector crisis in the country has also put banks on the back foot in lending to this sector. The cost of borrowing for mid-sized firms is high even in a falling interest rate regime because of the risk associated with infrastructure. For most such firms, in the last three quarters interest cost as a percentage of sales has risen.
A report by Motilal Oswal Securities Ltd points to a contraction in the Ebitda (earnings before interest, tax, depreciation and amortization) margin in the March quarter due to adverse revenue mix and modest profitability. “Net profit may decline 20% YoY (for the companies it covers), given that most of them would have a higher tax burden on the expiry of the tax holiday under Section 80IA," said the report.
That said, the sector would be back on the fast track from the second half of FY20 as road capex is one of the highest in terms of central and state government allocations. Stocks too would return to the spotlight once ordering activity improves.