IL&FS Engineering and Construction Company Limited's (NSE:IL&FSENGG) Shares Bounce 26% But Its Business Still Trails The Industry

IL&FS Engineering and Construction Company Limited (NSE:IL&FSENGG) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 112% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, IL&FS Engineering and Construction may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.6x, considering almost half of all companies in the Construction industry in India have P/S ratios greater than 2.2x and even P/S higher than 5x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for IL&FS Engineering and Construction

What Does IL&FS Engineering and Construction's Recent Performance Look Like?

IL&FS Engineering and Construction certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. Those who are bullish on IL&FS Engineering and Construction will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on IL&FS Engineering and Construction's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For IL&FS Engineering and Construction?

IL&FS Engineering and Construction's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 50%. Still, revenue has fallen 19% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 15% shows it's an unpleasant look.

In light of this, it's understandable that IL&FS Engineering and Construction's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From IL&FS Engineering and Construction's P/S?

The latest share price surge wasn't enough to lift IL&FS Engineering and Construction's P/S close to the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It's no surprise that IL&FS Engineering and Construction maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for IL&FS Engineering and Construction (1 is a bit unpleasant!) that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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