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Construction : Special Project | March 2016 | Source : CW-India

Top of the Charts

CW and EQUINOMICS RESEARCH offer a comparative evaluation of operating performance and reward to shareholders in the construction and allied sectors.

While global deflationary pressures continue to remain strong, on the domestic front, both the growth and Index of Industrial Production (IIP) of the eight core sectors remain quite weak. The corporate world is seeing near stagnation in profits over the past six quarters. Hence, the construction and allied sectors are also going through a tough time in terms of revenue and profit growth. In this difficult environment, we tried analysing the operating performance of listed companies falling in the construction and allied sectors for the latest quarterly period (October-December 2015) and for the cumulative period of nine months in the current fiscal (April-December 2015). We also tried comparing this operating performance with the performance of these companies on the stock markets. However, to evaluate the quarterly performance on shareholders´ wealth, we have taken the period of October 1, 2015, to February 15, 2016 - the period is extended by 45 days beyond the end of the December quarter, as the quarterly results are normally released within 45 days from the end of the quarterly period. This study throws up some interesting insights.

Construction

  • While net sales of 37 companies in this sector grew only by 4 per cent year on year (yoy) in Q3FY2016, it has managed to turn around its operations - the sector reported net profits of Rs 977 crore in Q3FY2016 compared to a loss of Rs 197 crore in the same period last year.
  • A similar trend was seen in the performance reported for the first nine months of FY2016; while sales grew by 5 per cent yoy, operating profit grew by 10.1 per cent yoy and reported a net profit of Rs 1,577 crore vs loss of Rs 167 crore in the corresponding period of last year.
  • The top performing company for both Q3 and 9MFY2016 was Gayatri Projects, which reported a profit growth of more than 340 per cent yoy in both Q3 and 9MFY2016 on a sales growth of around 7.4 per cent yoy and 10 per cent yoy, respectively.
  • During the period October 1, 2015 to February 15, 2016, the market cap of Sensex fell 9.4 per cent, and the construction sector saw a fall of 18 per cent in its total industry market cap. However, Gayatri Projects posted an impressive 6 per cent increase in its market cap, outperforming both the Sensex and the sector´s performance on the stock markets.

Real Estate
The real-estate industry went through a tough period in 2015. Last year, the residential segment saw the lowest number of new launches and sales volumes across the top eight cities of India since 2010. While sales volume during the year was similar to that in 2014, new launches fell sharply, by 21 per cent. Current unsold inventory levels stand at over 690,000 units. On the other hand, the office market witnessed severe shortage of good quality space, with demand consistently surpassing supply since 2014. Vacancy levels reached an eight-year low of 15.8 per cent in 2015 from 17 per cent in 2008.

Similar to 2014, demand surpassed new completions in 2015 as well. While 40.8 million sq ft of office space was absorbed in 2015, only 35.5 million sq ft was delivered. We took a review of 46 companies in the real-estate space, which are listed on the stock markets, for a comparative analysis of their operating performance and to evaluate their contribution to shareholders.

  • The sector as a whole (48 companies) clocked a sales growth of 10 per cent yoy, but net profit declined by 15 per cent yoy in Q3FY2016 owing to significant pressures in the industry.
  • The first nine months of the current fiscal also show a similar trend - while net sales of the industry grew by a mere 2 per cent yoy in the current fiscal, net profit fell 46 per cent yoy during the corresponding nine-month period last year.
  • Nitesh Estates remains the top performing company during the December 2015 quarter, but during the first nine months of the current fiscal, Brigade Enterprises posted the best performance with 194 per cent yoy growth in net profits.
  • The erosion in the market cap of this industry was much steeper with an 18 per cent fall from October 1, 2015, to February 15, 2016. Surprisingly, Arihant Superstructure has posted a 76 per cent jump in its market cap during this period as it has posted 175 per cent and 126 per cent yoy growth in net profit during the December 2015 quarter and nine months of the current fiscal, respectively.

Cement and Products
In India, demand for cement emanates from four key segments: Housing, accounting for 67 per cent; infrastructure, 13 per cent; commercial construction, 11 per cent; and the industrial sector, 9 per cent. As most of these end-users were going through a tough economic environment, the cement sector has gone through contraction in its demand growth. For the period April to December 2015, cement production grew by a mere 2.2 per cent over the corresponding period the previous year. As the construction and real-estate sectors remained subdued, the cement product business was also severely affected in the current fiscal. Of the 31 companies considered from this sector for review, the top four companies account for 80 per cent of the total market cap. However, smaller companies have performed surprisingly well in terms of operating performance.

  • This industry´s performance is the worst among all under this study; 31 companies collectively have posted 1 per cent yoy growth in revenues but 75 per cent yoy decline in their net profits in Q3FY2016.
  • Almost the same trend is visible for the first nine months of the current fiscal - while sales remained stagnant, net profit declined by 57 per cent yoy compared to the first nine months of the last fiscal.
  • Despite slowdown in the overall sector, Ramco Industries and KCP Ltd reported an exponential growth of 588 per cent and 1,699 per cent in their net profits for Q3FY2016 and 9MFY2016, respectively.
  • However, contrary to operational performance, the market cap of this industry declined only by 5 per cent during the period October 1, 2015, to February 15, 2016, outperforming the fall in the market cap of Sensex by 400 bps. Perhaps the market is banking on the initiatives taken by the government in housing and infrastructure. Among the top three performers in this sector, Ramco Cements has posted a maximum 15 per cent jump in market cap.

Steel
Global steel production in 2015 slipped back after five years of constant rises to 1.62 billion tonne, a decline of 3 per cent yoy. Last year, China, the world´s largest consumer and producer (accounts for around 50 per cent of world production), produced 803.8 million metric tonne (MT), down 2.3 per cent from 2014. The same trend was seen in Indian steel production, which declined by 2 per cent from April to December 2015. The steel industry in India has gone through tough times on account of Chinese steel firms dumping their production onto world markets at prices below cost. Owing to deflationary pressures, steel remained the most adversely impacted sector in India.

  • Fifty companies in this sector together have posted 21 per cent yoy fall in their revenues during Q3FY2016 quarter, while they collectively posted a net loss of Rs 6,837 crore in Q3FY2016 quarter as against a net profit of Rs 1,515 crore in the corresponding quarter of last year.
  • For the first nine months of the current fiscal, they posted 15 per cent yoy decline in revenues. Their net loss during this nine month period stood at Rs 5,703 crore as against a net profit of Rs 11,114 crore during the corresponding period last year. Lower net loss for the current nine month period indicates that the performance turned much worse in the latest quarterly period for the industry.
  • As core steel producers took the maximum pain of global slowdown and steep erosion in their price realisation, companies engaged in steel-related business but using core metal as inputs have actually fared better in terms of operational performance. Cheap steel prices helped them improve operating margins. Hence, Tinplate Co and Welspun Corp have posted 225 per cent and 253 per cent yoy increases in their net profits during the quarterly and nine-month periods, respectively.
  • While steel and allied industries as a whole saw a 5 per cent erosion in their market cap, Tinplate, among the top-performing companies, posted 5 per cent growth in market cap during the period October 1, 2015, to February 15, 2016.

Tiles and Sanitaryware
This small segment with 10 companies has done well in Q3FY2016. It has improved its performance substantially in the latest quarter, as this quarter alone accounted for 44 per cent of the total net profits of nine months period.

  • These companies together have posted 5 per cent yoy rise in their revenues in Q3FY2016; however, they posted a whopping 315 per cent yoy jump in their net profits in Q3FY2016.
  • For the first nine months of the current fiscal, they posted 6 per cent yoy increase in their revenues and a net profit of Rs 287 crore as against a net loss of Rs 18 crore during the corresponding period last year.
  • Pokarna has emerged as a unique player with a net profit growth of 203 per cent and 371 per cent on yoy basis during both the quarterly and nine-month periods.
  • However, among the top three performers in terms of financial performance, Rushil DTcor has given an impressive reward to shareholders in terms of 26 per cent increase in market cap during the period under study.

The whole segment gave only 2 per cent rise in market caps.

Paints
This industry is uniquely positioned compared to other industries in the construction and allied sectors. As crude oil derivatives form a third of total raw material costs, this industry benefited significantly in terms of margin expansions owing to the oil price crash.

  • Four major companies chosen for the study have posted double-digit revenue growth of 12 per cent yoy in Q3FY2016. However, their net profits collectively saw a 28 per cent yoy growth.
  • Even for the first nine months of the current fiscal, they posted a similar trend; 8 per cent yoy increase in revenues and 25 per cent yoy growth in net profits compared to the corresponding period last year.
  • Interestingly, the deviation in terms of performance among these four companies is not wide as seen in other industries.
  • However, Kansai Nerolac Paints emerges as the best performer during both the quarterly and nine-month periods with 29 per cent and 30 per cent yoy growth in net profits.
  • Among the top three performers in this industry in terms of financial performance, Kansai Nerolac Paints gave maximum return to shareholders with 10 per cent return, outperforming the Sensex return by 1,900 bps. The whole paints segment saw just 2 per cent rise in total market cap.

(View complete list of evaluated companies on www.ConstructionWorld.in)

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