Analysis - EARNINGS GROWTH KEY TO FUTURE PROSPECTS - Construction Cos High on Hope Need Orders to Sustain Build-up : The Economic Times

ET Intelligence Group:



Over the past year, the shares of construction companies such as Sadbhav Engineering, Ashoka Buildcon, MBL Infrastructures, Simplex Infrastructure and KNR Construction have risen in the range of 24-148%. The investors' interest in these stocks can be attributed to their belief that these companies would be benefitted by new order flows.

However, contrary to the belief, order inflows failed to pick up in a meaningful manner, thereby limiting earnings growth of these companies. Considering this against the backdrop of higher stock valuations of these companies, investors need to look at the earnings growth trajectory by the end of the December quarter before taking fresh exposure in these stocks. At the end of FY15, the aggre gate order book of the five construction companies fell 4% compared with the previous fiscal.

Though the present order book provides reasonable revenue visibility for the next 4-5 quarters, only a pickup in order intake will result in a substantial revenue growth going ahead.

During the current fiscal, the roads ministry, including National Highway Authority of India (NHAI), intends to award 9,000 km of projects. Out of these, 2,500 km is estimated to be awarded through engineering, construction and procurement (or EPC) or the construction route. During the previous fiscal, 3,000 km of projects were awarded.

Companies such as Sadbhav En gineering, Ashoka Buildcon and MBL Infrastructures, which re rained from bidding aggressively or getting road projects during the past years, would be chief beneficiaries. Besides this, these companies are likely to benefit from lower nterest rates in this fiscal itself.

Given this, investors have shown keen interest in these companies n the past one year. As a result, hese companies are not trading cheap. At the current stock prices, hese companies are trading at a price-to-book value between 1.3 and 3.2. Further appreciation in hese stocks will depend on profit growth over the next few quarters.

In FY15, construction companies showed an improvement in operat ng margins owing to lower raw ma erial costs. However, given the high nterest rates, their net profit growth has remained muted. Simplex Infra, Sadbhav Engineering and Ashoka Buildcon recorded fall n profits, while MBL and KNR Construction recorded 6% and 15% growth in net profit, respectively , in FY15 in comparison with FY14.