Investors can sell their holdings in construction contractor, BL Kashyap & Sons. While order book is satisfactory, revenue growth has been decelerating. Operating and interest costs have done the opposite, with the result that the net profits plummeted 97 per cent in the December '11 quarter. At Rs 10.7, the stock is at eight times the trailing 12 month earnings.

Real estate focus

Kashyap executes construction contracts in real estate, rail projects and industrial buildings. Order backlog is around Rs 4,500 crore, at 2.8 times revenues for 2010-11. But orders are primarily in residential and commercial contracts, both of which are passing through sluggish times.

This, together with its limited experience in the more promising infrastructure space, suggests that a strong growth in order book may not materialise. Kashyap also has a real-estate subsidiary, Soul Space, which develops commercial real-estate projects. It has faced trouble in monetising some of the completed projects.

Kashyap had, in August last year, been charged with evasion of paying provident fund dues to the tune of Rs 593 crore. The company's consolidated cash position, as of end-March '11, was Rs 34 crore. While the company filed an appeal and obtained a stay on the order, the appeal has not been fully disposed.

Cost pressures

Raw material and labour costs shot up 51 per cent and 35 per cent for the nine months ended December '11. As a proportion to sales, the two cost heads were at 90 per cent; they were 85 per cent the year ago.

Debt: equity is also on the high side for the company at 1.1 times. Interest outgo in the three quarters ending December '11 have risen 44 per cent. Interest has also doubled in the previous financial year. Operating profits now cover interest by just 1.6 times.

With interest rates not showing signs of going down, the interest burden will continue to dent profitability for the company.

Costs of inputs such as cement and steel are also high. Cost pressures are, therefore, unlikely to abate in the coming quarters.

Earnings decline

Kashyap had two consecutive years of revenue and profit decline in FY-09 and FY-10. Compounded annual revenue growth was just 1 per cent to Rs 1,595 crore for the three years ended March '11, while net profits declined 25 per cent to Rs 45 crore in this period.

The company was beginning to stage a recovery in the year ending March '11 with net profits expanding 16 per cent on lower input costs and higher ‘ other income'. But the revenue growth began decelerating from 47 per cent in the June '11 quarter to 11 per cent by the December '11 quarter.

With the high cost scenario, net profits staged a drastic fall of 64 per cent for the nine-months ended December '11. Operating margins declined to 7 per cent in the same period, down from the 11 per cent the year ago. Net profit margins stood at less than 1 per cent.

Kashyap did manage to maintain working-capital cycles. But with increasing debt and a ratings downgrade of bank facilities to non-investment grade, the company may find funding new projects difficult.

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