Infrastructure companies are facing tough times. Rising interest rates, higher cost of labour and inputs , difficulty in securing clearance for new projects, delays due to land acquisition and right of way et al have plagued the sector over the last two-three quarters. The result: companies in this space have borne the brunt.
All indications are that the situation is unlikely to improve unless the rate of inflation is tamed or a catalyst emerges that can jumpstart the sluggish sector, say representatives of leading infrastructure companies.
Overall margins
The engineering, procurement and construction (EPC) business — from an industry perspective — works on low margins, compared to implementation of other projects, said Mr R. S. Garg, Chief Financial Officer, Ramky Infrastructure Ltd. Any increase in interest rates, which has been on the up over past few quarters, impacts overall margins. “From our own estimates , every one per cent increase in interest rate ends up clipping 0.3 per cent of the profits. In the recent past, interest rates have gone up by over four-six per cent. That is enough to wipe off profits,” Mr Garg said.
Mr Y. D. Murthy, Executive Vice-President, Financé, NCC Ltd, said the general conditions for business haven't been rosy and the order book flow, too, has slowed in sectors such as roads and power. It has become tougher to implement projects due to delays in clearances; and profit margins continue to face the squeeze, he pointed out.
IVRCL Assets' Chief Financial Officer , Mr S.V. Ramkumar, said, “The interest rate increases are a major cause for concern (as it) directly impacts the EBIDTA margins. This means lower profit after tax for all infrastructure companies, as all of them are bearing the brunt of the changed economic situation.”
In fact, a review of the results season by Angel Broking, has found that despite a decent growth in topline, infrastructure companies have registered lower EBITDA margins.
The valuations of infrastructure companies have been abysmal and there is lack of any intervention by the Government to support the sector, said Mr Shailesh Kanani, Senior Research Analyst, Angel Broking.
Not surprisingly, valuations are down and stocks have taken a beating.