Cosy order position won't move infra needle

Robust profit visibility, but high debt, working capital may limit growth of road, urban infra firms

Currently, infrastructure companies in urban and road construction are witnessing a good business scenario. In addition to road projects worth Rs 55,000 crore (3,500 kilometres or km) rolled out by National Highways Authority of India (NHAI), Rs 76,000 crore (5,900 km) of orders are still in the pipeline for FY17. In fact, urban infrastructure companies such as Ahluwalia Contracts and J Kumar Infraprojects already have profit visibility for two to three years, due to state government projects flowing in. All these augur well, particularly for EPC (engineering, procurement, and construction) companies as they are not mandated to deploy equity to execute these orders.

But, it may be a while before robust orders reflect in their profits. Credit Suisse indicates that the order inflow, which changed dramatically for the better in FY16, was still inadequate to result in a meaningful profit improvement. KNR Constructions, J Kumar, and Ahluwalia saw average revenue growth of 8-12 per cent per year over FY13-14, and continue to see their revenues grow in a similar range (9-14 per cent) in FY16. Their order inflows, growing annually at 15-20 per cent each till FY15, accelerated to 50-60 per cent growth in FY16.

"Order inflow in FY16 is almost double from FY13 levels. But, revenues were up only 11 per cent in FY16," Credit Suisse says. High debt, its impact on pace of order execution, and its effect on increasing the need for working capital (used in day-to-day operations) are the key reasons limiting their profit growth, say analysts. Execution rate deteriorated from 20 per cent yearly completion in FY10 to 12 per cent in FY16, hampering cash flow cycle and increasing dependence on short-term money.

Ahluwalia's working capital need grew from 14 days in FY10 to 80 days in FY16. KNR Constructions' working capital need grew from three days in FY10 to 79 days in FY16, and J Kumar's requirement shot from 64 to 160 days over the period. "Debt has risen sharply, which limited the ability to grow business profitably," says Credit Suisse.

Add to this the bidding war for EPC contracts, which is intensifying — with discount of 6-12 per cent to NHAI's base cost. "Such aggression could lead to losses or stretched liquidity of developers, thereby impacting the pace of execution," says Shubham Jain, vice-president, Icra. This is why analysts' consensus on profit is coming down. In Q2, while revenues may grow 15-18 per cent, net profit could grow only 10-12 per cent. The key point is that companies need to cut down on debt fast and improve cash generation, which will allow them to accelerate revenues and improve their profits.