Investor sentiment seems to be turning positive on the engineering and construction sector once again. Increasing order inflows, improvement in project execution and high expected spending are providing the stimulus. The government’s spending on infrastructure projects is also expected to pick up significantly in the next few years.
The fourth quarter of FY10 saw a revenue growth of 25-28 per cent over the previous year for engineering and construction firms, says Macquarie, a brokerage house. This compares to a growth rate of just 10 per cent for the first nine months of FY10, according to the broker. Based on the strong order inflows, Macquarie has projected a topline growth of 25-28 per cent for the sector.
Some other research houses are more bullish on these companies. HSBC is projecting a growth of 30-32 per cent per annum for construction companies over the next two years. The brokerage says that the government is projecting a total spending of $135 billion annually over FY11 and FY12. This compares to an annual spending of just $55 billion over the past three years. According to UBS, the spending on infrastructure could be $300 billion over the next three years and $500 billion over a five year period.
Amongst the larger infrastructure players, L&T is one company that finds favour. Apart from being present in most of the segments of the infrastructure business, L&T is also coming up as a project developer. The company is also trying to get into new businesses including power generation and manufacture of power equipment.
Amongst the mid-cap construction players, Hyderabad-based IVRCL and Nagarjuna Construction are amongst the top picks for several brokerages. This is because apart from their construction business, the companies are also coming up as project developers.
Suzlon and Punj Lloyd figure amongst the not so fancied firms.
Apart from a weak balance sheet, Suzlon’s order book also continues to be a cause for concern. Punj Lloyd is also facing some problems in its global businesses.