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For midsize engineering companies, interest cost turns millstone

Wednesday, 21 November 2012 - 8:30am IST | Place: Mumbai | Agency: DNA
Rising interest costs have started telling on the profitability of mid-size engineering and infrastructure companies.

Rising interest costs have started telling on the profitability of mid-size engineering and infrastructure companies. Despite registering sound revenue and operating profit numbers, some of these players have reported a decline in net profit for the quarter ended September.

To be sure, the project cycles have elongated with clients holding back payments, forcing these companies to pile up more debt on their balance sheets and leading to pledging of shares by promoters to raise working capital.

McNally Bharat Engineering, promoted by Deepak Khaitan is a case in point.
McNally logged an improvement of 3.0% and 20.3% in topline and earnings before interest, tax, depreciation and amotisation (Ebitda) of Rs513 crore and Rs9 crore, respectively for the quarter. Ebitda margin also improved to 7.68% from 6.57%.

However, its profit after tax, or net profit, fell 20%.

McNally took a hit because of the high working capital loan it has raised to counter the delays in payments from its customers, said an SBI Cap Securities analyst, requesting anonymity.

Total borrowing stood at Rs653 crore, up 50% from `435 crore at the end of March. The hunger for capital is evident from the fact that the shares pledged by promoters has increased to 53% from 43% a year ago.

According to the SBI Cap analyst, McNally gets most of its order from power generation, metal and mining sectors, which are bearing the brunt of the slowdown in capital expenditure due to fuel supply constraints and ban on mining in key states.

“Only trigger that can push the company out of this mess will be solving the fuel supply problems of generators and cut in interest rates,” said the SBI Cap analyst.

Similarly, Tecpro System, promoted by Ajay Kumar Bishnoi and Amul Gabrani, posted a 30% growth in revenue, 53% growth in Ebitda and saw its Ebitda margin improve to 15.1% from 13.1% a year ago. Net profit, however, grew slower, at 46.5%.

Alarmingly, Tecpro’s debt level was at Rs1,755 crore at the end of September, compared with Rs1,021 crore a year ago – a whopping 72% increase.

As much as 69% of the company’s order book of `4,430 crore is from the power sector, where clients are not able to pay on time due to fuel related issues, and this has led it to take more working capital loans, Rabindra Nath Nayak and Nirav Vasa of SBI Cap noted in a report dated November 12.

The impact of rising debt was visible in the 55% year-on-year increase in Tecpro’s finance charges to Rs73.4 crore for the second quarter and Rs140 crore for the first half, said the SBI Cap duo, adding that the debt-to-equity ratio of 2.3x is a concern.

John Perinchery, senior analyst, Asian Market Securities, concurred. “Soaring interest expense impeded profit growth,” he said in a November 15 note.

Delay in customer payment and lack of management strategies to recover long-pending receivables could impede Tecpro’s profit growth going ahead, he noted. Total debtors at the end of September stood at Rs2,400 crore, of which Rs800 crore was retention money.


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