X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Things to watch out for in Infrastructure cos. - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Things to watch out for in Infrastructure cos.

Apr 9, 2010

It's a well known fact that India is grossly under invested in infrastructure. In a move to bolster infrastructure investments in the country and enable higher economic growth, the government plans to double infrastructure spending to US$ 1 trillion in the 12th five year plan. Around 50% of the investment is expected to come from the private sector. This presents vast opportunities for the companies engaged in construction and infrastructure development in India. There is no doubt the sector will continue to remain preferred investment bet for investors over the longer term excluding near term execution concerns. If one wants to play the India story then exposure to the construction space is inevitable. But as there are plenty of companies listed on the Indian bourses, cherry picking is a difficult task.In this article, we try to decode key aspects of the construction companies that could possibly aid investors in selective stock picking.

  • Book to bill ratio: Book to bill ratio is the ratio of orders taken to invoices sent (sales) during a set period of time. A high ratio indicates a strong order backlog that should generate sales and profits in future periods while a low ratio indicates falling demand. It is one of the most important measures used to analyze the health of construction companies. Thus higher the ratio better it is.

    Book to bill ratio: Order backlog / Sales
    Book to Bill RatioFY06FY07FY08FY09
    IVRCL Infrastructure4.53.13.32.8
    Nagarjuna Construction2.92.53.32.9
    Hindustan Construction4.93.93.34.9
    Book to bill ratio of select construction companies

  • Investment in subsidiaries: Over the last few years, infrastructure companies have typically increased their investments in subsidiary companies. These subsidiaries or SPVs undertake BOT projects on the parent's behalf thereby presenting a leaner holding structure. Investment in subsidiaries will not be generating incremental returns to shareholders at least in the near term as BOT projects require huge upfront construction cost (with back loaded returns spread over the concession period) and have long gestation period. This depresses initial RoE. Hence, investments have to be adjusted to give a true picture about the RoE.

    Adjusted RoE = PAT/(Net worth - Investments)
    Investments as % of Capital EmployedFY06FY07FY08FY09
    IVRCL Infrastructure24%15%13%12%
    Nagarjuna Construction6%28%23%25%
    Hindustan Construction6%9%10%11%
    Investments as a proportion of capital employed of select construction companies
  • Working capital cycle: Infrastructure is a working capital intensive business due to higher share of government contracts in the overall project portfolio. The projects have a high gestation period further prolonging the overall cycle. Higher working capital denotes extension of interest free loans with no incremental returns. Hence, companies that manage their working capital cycle better are preferred bets.

    Working capital Cycle: Working capital/Net sales*365
    Working capital cycle (Days)FY06FY07FY08FY09
    IVRCL Infrastructure122179179164
    Nagarjuna Construction16868121139
    Hindustan Construction77187164192
    Working capital cycle of select construction companies

  • High Debt/Equity ratios: The construction companies typically have leveraged balance sheets. Majority of the debt is taken to fund working capital requirements (sharp contrast to other industries where debt is used to finance capex). This debt is of short term in nature. Construction companies also use the debt raised to finance BOT projects. (BOT projects typically have a debt/equity ratio of 2:1).

    Debt/Equity ratios of select construction companies
    D/E Ratio (Consolidated)FY06FY07FY08FY09
    IVRCL Infrastructure10.50.60.7
    Nagarjuna Construction0.20.811.6
    Hindustan Construction1.42.22.94.6

  • BOT & Real Estate Projects: Apart from a few exceptions, most of the construction companies have a large portfolio of BOT and real estate projects. Under the classic BOT project mechanism, the company typically builds, operates and then ultimately transfers the project to the contactor (government in most cases) after the expiry of the concession period. Majority of the road projects awarded by NHAI are on BOT basis. Construction companies are also engaged in development of various real estate projects. Diversification into related businesses provide significant value unlocking potential.

    List of BOT projects of select construction companies/
    ParticularsRoad BOT ProjectsWater BOT projects Power BOT projects Miscellaneous Total
    IVRCL Infrastructure720110
    Nagarjuna Construction503 8
    Hindustan Construction40004


Equitymaster requests your view! Post a comment on "Things to watch out for in Infrastructure cos.". Click here!

1 Responses to "Things to watch out for in Infrastructure cos."

danish

Dec 9, 2017

good effort very useful information

Danish

Like 
  
Equitymaster requests your view! Post a comment on "Things to watch out for in Infrastructure cos.". Click here!

More Views on News

IVRCL LTD Announces Quarterly Results (3QFY19); Net Profit Down 29.9% (Quarterly Result Update)

Feb 11, 2019 | Updated on Feb 11, 2019

For the quarter ended December 2018, IVRCL LTD has posted a net profit of Rs 4 bn (down 29.9% YoY). Sales on the other hand came in at Rs 2 bn (down 46.5% YoY). Read on for a complete analysis of IVRCL LTD's quarterly results.

IVRCL LTD 2017-18 Annual Report Analysis (Annual Result Update)

Dec 18, 2018 | Updated on Dec 18, 2018

Here's an analysis of the annual report of IVRCL LTD for 2017-18. It includes a full income statement, balance sheet and cash flow analysis of IVRCL LTD. Also includes updates on the valuation of IVRCL LTD.

IVRCL LTD Announces Quarterly Results (2QFY19); Net Profit Down 58.1% (Quarterly Result Update)

Nov 27, 2018 | Updated on Nov 27, 2018

For the quarter ended September 2018, IVRCL LTD has posted a net profit of Rs 4 bn (down 58.1% YoY). Sales on the other hand came in at Rs 2 bn (down 42.1% YoY). Read on for a complete analysis of IVRCL LTD's quarterly results.

IRCON International IPO: Is This PSU Worth Betting On? (IPO)

Sep 17, 2018

Should you subscribe to the IPO of IRCON International Ltd?

Capacit'e Infraprojects Ltd. (IPO)

Sep 12, 2017

Should you subscribe to the IPO of Capacit'e Infraprojects Ltd?

More Views on News

Most Popular

Stocks that Could Be Out of Reach Post Elections(The 5 Minute Wrapup)

Apr 9, 2019

It's a matter of time before the stocks catch the fancy of the markets and big investors.

3 Indian Stocks with Amazon-Like Potential(Profit Hunter)

Apr 10, 2019

We have identified 3 stocks with huge wealth building potential which meet our 'Click of a Button' criteria.

This Company is Making a Big Comeback and You Can Now Profit from Its Example(The 5 Minute Wrapup)

Apr 10, 2019

How Dell got its mojo back.

This is Why the Stock of Jubilant FoodWorks Went Up 1,160%(The 5 Minute Wrapup)

Apr 12, 2019

This critical business strategy has enabled companies to scale their operations faster.

Pocketing Massive Gains with HDFC And HDFC Bank(Profit Hunter)

Apr 12, 2019

Here's how one could have generated gains of Rs 59,250 in 10 days by trading HDFC and HDFC Bank with a capital of Rs 4 lakh.

More

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms

IVRCL SHARE PRICE


Apr 22, 2019 03:33 PM

TRACK IVRCL

COMPARE IVRCL WITH

MARKET STATS