Beware of bumps

The first quarter report card for 2017-18 is out. We evaluate the performance of the Infrastructure sector to see what lies ahead

The business of roads and other transport-based infrastructure services provided a silver lining in the cloud for infrastructure companies in 2016-17. About 8,200 km of roads was constructed in 2016-17, a record so far in any given year, albeit lower than the Centre’s target of 15,000 km. Road operators benefited from the new regulation of 2016, which allowed Hybrid Annuity Model (HAM)-based projects to be floated, which effectively reduced the equity burden on developers.

Moreover, with the government’s thrust on transport-based infrastructure, be it railways, roads, waterways or civil aviation, orders kept flowing, albeit with delays. However, the power, energy (especially oil-related) and real estate segments were a dampener.

The aggregate sales of 19 infrastructure companies, which included construction and engineering companies, were up by 4 per cent Y-o-Y in 2016-17. The aggregate revenue was shored up by the bigwigs — Larsen & Toubro (L&T) (7.2 per cent) and Adani Ports & Special Economic Zone (APSEZ) (18.8 per cent) in 2016-17.

In the June quarter of 2017-18, aggregate revenue was up by a higher 14.2 per cent. Many companies, including APSEZ, Ashoka Buildcon and IRB Constructions, recorded revenue growth over 20 per cent in the recent quarter.

Winners and losers

While strong growth in domestic orders as well as robust existing order book boosted revenue for L&T, for APSEZ it was regular expansion, coupled with diversification of product handling capabilities at its existing ports, that drove its volumes.

Morever, those into road infrastructure services, IRB Infrastructure developers and Ashoka Buildcon, were able to put up a strong performance in 2016-17. While IRB infrastructure improved its sales and net profit by 14 per cent and 12 per cent respectively in 2016-17, Ashoka Buildcon managed to reduce losses significantly in 2016-17 and also double its profit in the June quarter of 2017-18. The company’s fortunes were largely led by stronger execution.

At the aggregate level, there was a turnaround of operations witnessed by the infra companies in 2016-17; they reported an aggregate profit of ₹2,756 crore in 2016-17 as against a loss of ₹87 crore a year before. It was triggered by improvement in profit figures of the two biggies, L&T and Adani Ports, along with reduction in losses for players such as GMR Infrastructure and Punj Lloyd.

In contrast, Jaiprakash Associates was a party pooper with its net losses widening from ₹3,114 crore in 2015-16 to ₹5,616 crore for 2016-17. GMR Infrastructure’s airport revenues grew well in 2016-17.

Moreover, the company managed to considerably reduce debt as well as interest burden from the cash generated from the sale of stakes in GMR Energy.

What lies ahead

While the transport-based infrastructure projects have already given the necessary booster, the Centre’s budgeted ₹3,96,000 crore for infrastructure in 2017-18 can, in turn, kick-start infrastructure projects in various other segments of infrastructure. However, private capex needs to pick up to give a boost to the order books of these companies.

At the moment, risk-averse investors are better off holding stocks of diversified players and those with strong operational efficiency.

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