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A) Construction

This section provides a brief overview of current and past financial performances of 65 listed construction companies operating in the following sub segments:

  1. IT parks, SEZs and commercial establishments
  2. Roads, highways and bridges, railways
  3. Irrigation, sanitation, sewage and water-related projects
  4. Industrial plants (fertilisers, chemicals, cement, steel etc)
  5. Minerals, refinery, oil and gas plants
  6. Power infrastructure
  7. Townships and residential projects
  8. Others, such as schools, colleges, hospitality, hotels, stadiums, amusement parks and other civil works.

The total turnover of these 65 listed companies in the construction sector considered for insights was Rs 439.95 billion as on March 31, 2008.

Profitability on an extremely high trajectory in FY08
During FY04 to FY08, total income and net profit of the sample companies grew by 35.9% and 80.4%, respectively, on a CAGR basis. Contribution of other incomes in total income increased marginally from 2.72% in FY04 to 3.5% in FY08. In FY08, total income and net profit grew by a remarkable 54% and 95%, respectively.

Raw materials accounted for more than one third of the total expenses in FY08
Total expenses increased on a CAGR basis of 35% from FY04 to FY08. Contribution of personnel cost, raw materials, depreciation, interest paid, repair and maintenance, rent, marketing and advertising cost increased from 43.0% in FY04 to 51.8% in FY08.

 

The cost of raw materials increased on a CAGR basis by 47.3% during FY04-FY08. The cost of raw materials rose the most in FY05 by 82%. Contribution of raw materials to total expenses increased from 23.9% in FY04 to 34.0% in FY08. Contribution of personnel cost increased marginally from 6.0% in FY04 to 6.34% in FY08.

Interest cost grew by 47.5% on a CAGR basis during FY04-FY08 on account of rapid expansion in the construction sector, which was funded by both equity and borrowed funds. Thus, the contribution of interest cost increased from 3.0% in FY04 to 4.29% in FY08.

During FY04 to FY08, marketing and advertising costs increased by more than 30% on y-o-y basis. However, the contribution of marketing and advertising cost to total expenditure decreased from 1.7% in FY04 to 1.42% in FY08.

Loans and advances show sharp increase

Current assets grew by 54% on a CAGR basis during FY04-FY08. Receivables and inventories were the major contributors in working capital, however, their contribution decreased from 81.4% in FY04 to 71.14% in FY08.

 

Loans and advances increased by 97% on a CAGR basis during FY04-FY08. Share of loans and advances increased from 5.9% in FY04 to 15.9% in FY08. The nature of construction business is such that companies in this sector have a tendency to operate through their subsidiaries, group companies, or joint ventures. Hence, large amounts of money advanced to companies are in the form of loans. Loans provided to subsidiary companies are major contributors to loans and advances. These advances increased from 70.1% in FY04 to 97.4% in FY08. Loans provided to subsidiary companies grew by more than 100% on a CAGR basis during FY04-FY08.

Contribution of receivables decreased from 45.6% in FY04 to 36.8% in FY08; however, it increased by more than 40% on a y-o-y basis from FY05 to FY08. Cash and bank balances increased by 51.3% on a CAGR basis, denoting the financial strength of the sector.

In FY08, companies’ current assets and current liabilities grew by 64.23% and 36.49%, respectively, thereby increasing the current ratio to 2.19 times from 2.64 times. The acid test ratio also increased from 0.63 times in FY04 to 1.21 times in FY08 on account of high cash and bank balance.

Average RoNW of around 20.5% over the five year period

During FY04 to FY08, the sample companies’ EBIT posted a growth of 68.22% on a CAGR basis. Their operating margins grew from 9.8% in FY04 to 23.09% in FY08, whereas their net profit margins increased from 4.7% in FY04 to 14.4% in FY08. The companies’ RoCE increased from 17.36% in FY04 to 20.11% in FY08, correspondingly its RoNW also increased from 16.6% in FY04 to 20.87% in FY08, maintaining average returns of 20.5%.

B) Power

This section provides a brief overview of current and past financial performances of the listed power companies dealing in generation, distribution, and transmission. Companies involved exclusively in trading of power have been excluded. The total turnover of the listed companies in the power sector considered for insights was Rs 683.5 billion as on March 31, 2008.

Income and profitability grow hand-in-hand

Total income in the sector grew by 10.27% and net profit by 11.24% on a CAGR basis during FY04 to FY08. The total income increased approximately by 5.0% y-o-y from FY04 to FY06 and further increased by 16.0% y-o-y from FY06 to FY08. The other income contribution increased from 7.60% in FY04 to 8.57% in FY08.

Fuel cost escalation leads to rising expenditure

Although the total expenditure decreased by 2.0% in FY05 as compared to FY04, it increased on a y-o-y basis by 14.6% from FY06 to FY08.

Contribution of raw material cost, personnel cost, interest paid, depreciation, marketing and advertising expenses in the total expenditure increased from 71.85% in FY04 to 77.70% in FY08.

Contribution of raw materials in total expenses increased from 42.90% in FY04 to 54.04% in FY08. Cost of raw materials increased the most in FY07 (by 22%) on account of increase in cost; consequently, profitability was affected during FY07. Raw material cost increased at a CAGR of 16.8% during FY04 to FY08.

Labour cost grew at a CAGR of 12.35% during FY04–FY08. Contribution of labour cost in total expenditure increased from 5.70% in FY04 to 6.20% in FY08. Interest cost grew by 33.0% and 14.8% in FY07 and FY08, respectively, on account of rapid expansion in the power sector, which was funded by both equity and borrowed funds. However, contribution of interest cost to total expenses decreased from 8.80% in FY04 to 7.91% in FY08.

In FY07, marketing and advertising cost increased by 37.27% but in FY08 it decreased by 4.50%. The contribution of marketing and advertising cost in total expenditure decreased from 2.69% in FY04 to 1.72% in FY08.

Loans to subsidiaries on rise

The current assets of the selected players grew at a CAGR of 17.0% during FY04–FY08. In FY07, current assets grew by a remarkable 35.78%. In FY08, receivables, and cash and bank balances contributed nearly 61.56% of current assets, of which cash and bank balances contributed more then 35%, which reflected the power sector’s robust financial liquidity.

In FY04, share of loans and advances in the selected power sector players’ current assets was 8.9%, which further increased to 14.87% in FY08. In the power business, companies commonly operate through their subsidiaries or joint ventures. Loans provided to subsidiary companies of power companies are in fact a major contributor to loans and advances; the contribution of these loans in the total loans increased from 75.67% in FY06 to 84.2% in FY08.

Contribution of receivables in current assets decreased from 65.5% in FY04 to 22.7% in FY08; however, it increased by 32% y-o-y in FY08. Player’s cash and bank balances grew at a CAGR of 58.3% during FY04-FY08, which shows the power sector’s financial strength.

In FY05, current liabilities decreased by 5.5%. In FY07, current assets and liabilities increased by 35.8% and 29.5%, respectively, thereby increasing current ratio to 3.47 times from 3.33 times. During FY04 to FY08, however, acid test ratio increased substantially from 1.96 times to 2.71 times on account of high cash and bank balance.

Margins

During FY04-FY08, companies in the study reported EBITDA posted a growth of 9.2% on a CAGR basis. Operating margins increased from 28.46% in FY04 to 30.13% in FY08, whereas net profit margins posted an average return of 18% during this period.

The power sector’s RoCE decreased from 13.3% in FY04 to 12.68% in FY08; however, the sector maintained an average return of approximately 12.35%. Correspondingly, its return on net worth (RoNW) decreased from 13.05% in FY04 to 12.7% in FY08, maintaining average returns of more than 12.50%. It can be inferred from an analysis of the sector’s RoCE and RoNW that companies in this sector are optimally geared by an equitable mix of debt and equity and are able to generate constant return over the period.