Tuesday, June 27, 2006
The construction industry in India has received a fillip during the past 3 years, with the government showing increased focus towards developing a strong and sound infrastructure setup in the country. The industry is the second largest economic activity after agriculture, and is estimated to grow at an average rate of 9.5% during FY02 to FY06, against 8.6% average growth for the services sector during this period. In this article, we compare the two major players in the construction sector – IVRCL Infra and HCC – and see where they stand on a relative basis.
|About IVRCL Infra|
Now, if one were to look at HCC's business mix (right hand pie chart), revenues are almost equally diversified into transport, water supply and hydel power segments, among others. In the transport segment, the company is especially focusing into BOT based projects, where margins tend to be relatively higher than the contract business.
On comparing these two companies on financial parameters, while IVRCL has grown revenues and net profits compounded rates of 39% and 32% during the period FY02 to FY06, the growth for HCC has been 37% and 38% respectively. However, if one were to compare the profitability, IVRCL scores over HCC in terms of sustaining margins at the operating level. As seen from the adjacent chart, while EBIDTA margins for IVRCL have moved in a narrow range of 8% to 10% during FY03 to FY06, the same for HCC have declined from 16% to just over 9% during this period. Focus on relatively low margin road construction sector seems to have been the main reason for the declining margins of HCC. On the other hand, water treatment contracts earn better margins due to more complex execution and this has benefited IVRCL in the past. However, one must note that considering the influx of a large number of players into the construction space, companies have sacrificed margins to gain on volumes. The same is likely to continue in the future as well and, to that extent, profitability is likely to be impacted, for HCC and IVRCL alike.
|(Rs m)||IVRCL Infra||HCC|
|EBITDA margins (%)||9.0%||9.1%|
|EBIT margins (%)||8.6%||6.6%|
|Net profit margin(%)||6.2%||3.7%|
|Diluted EPS (Rs)||8.7||3|