Consensus is fast emerging that it’s time for cyclical stocks to start driving the markets, as the consumption theme has run its course. From a valuation point of view, this theory might be accurate. Yet, from a business point, infrastructure stocks are likely to see sluggish growth for more time, as the core issues have not been resolved. The sector’s first quarter revenue and earnings growth will reflect the stress it is under.
The Street believes interest rates are peaking and execution would improve. There’s a huge build-up in order backlog, which has stretched working capital cycles. HCC’s working capital cycle, which is elevated, needs to be monitored, says Edelweiss Securities. After steady flows in the road sector through FY12, new orders slowed in the last quarter. But analysts expect 9,500 km of road projects to be awarded in FY13. The dedicated freight corridor is another area where analysts expect to see order inflows come in.
Though analysts are bullish on the sector from a medium-term perspective, they believe it is important to pick companies which have a strong order-book visibility, strong cash-generating ability and lower risk of delay in commencement of toll collection.
In the first quarter, high interest rates and slow execution will plague the sector’s earnings, analysts believe. According to Emkay Global, interest expense for the infrastructure universe will grow 23 per cent year-on-year, with major contribution from Ashoka Buildcon and IL&FS Transportation with 82 per cent and 53 per cent year-on-year growth, respectively. Among other key players in the sector, Emkay expects GMR Infrastructure’s Q1FY13 revenues to grow 24 per cent year-on-year to Rs 2,320 crore. Analysts expect GMR to report a net loss at Rs 130 crore, due to a 24 per cent YoY rise in interest outgo to Rs 460 crore. Increases in tariffs will start showing only from Q2, claim analysts.
Though from a medium-term perspective, analysts are bullish on the sector, key infrastructure companies (ex-developers), are estimated to clock single-digit revenue growth in Q1. Overall profitability of the infrastructure space is likely to remain muted, as interest costs will hurt. Also, most parent companies have borrowed heavily to invest in special purpose vehicles and this would also pinch profitability. Despite this, some analysts have a positive stance on IRB Infrastructure and Ashoka Buildcon, as these companies are in a better position in terms of execution.