In the spotlight: Growth signs visible for road infrastructure players

Analysts expect better order flows, improving labour availability and rising construction activities to boost second half performance

Road infrastructure players are in the spotlight with improving order flows, better labour availability, and construction activities gaining pace as the monsoon season comes to an end. For toll road operators, the improving traffic, too, bodes well.  Overall, analysts expect a much better second half of FY21 after a significant impact from the lockdown during the first half.

Alok Deora of YES Securities says there is a significant improvement in the outlook each passing day with improving labour availability (70-80 per cent now); toll collections, too, have improved to about 80 per cent (of pre-Covid levels). As Deora expects further improvement after the end of monsoon, the second half is likely to take care of weakness witnessed in the first half to an extent. The second half always remains key for infrastructure firms and significantly better than the first half in terms of order flows, execution, and receivables. The better second half performance and rising order flows should lead to FY22 earnings estimates getting upgraded, too, and hence, the current estimates reflecting pressure on forward earnings for some players is not a concern, say analysts.   

The news flow on order receipts is already encouraging. For instance, Dilip Buildcon has announced receiving the letter of acceptance (LoA) on September 9 from the National Highways Authority of India (NHAI) for the hybrid annuity model (HAM) project in Bihar.

Analysts say both execution and awarding activity appear to have recovered faster than expected. While the expectation was of a visible slowdown due to the lockdown, road EPC (engineering, procurement, and construction) companies have ramped up faster on the execution front since the phased unlocking of the economy. Those at Nomura attribute the same to liquidity infusion measures undertaken by the Ministry of Road Transport and Highways. The implementation of relief measures provided liquidity support, while the order awarding has surged. The NHAI awarding 26 projects spanning 744 km and worth Rs 31,000 crore over the April-August period is said to be higher than the first five months’ activity seen during the past three financial years. Analysts expect another Rs 50,000 crore worth of NHAI tenders to be awarded in three months.

Nomura is preferring Dilip Buildcon, PNC Infratech, and KNR Constructions which have beaten consensus estimate, as well as Nomura’s revenue and Ebitda estimates during Q1. Deora, on the other hand, is preferring KNR Constructions and PNC Infratech, and is positive on Ashoka Buildcon. 

Emkay Global, too, is including PNC Infratech and KNR Constructions in its top picks. Other picks of Emkay include L&T and Kalpataru Power, looking at their order visibility from the national infrastructure pipeline.

PNC, which has already doubled since March intra-day lows, remains analysts’ favourite. Recent wins-driven augmented revenue assurance and gradually returning execution efficiency are some levers making a case for PNC to sail again on the growth trajectory, sooner than later, say analysts at Anand Rathi. Though working capital may have got slightly stretched, analysts feel the balance sheet is still in shape to help execution efficiency return at the earliest. The target prices of Anand Rathi, YES Securities, and Nomura range between Rs 205 and Rs 255, indicating a further upside of close to 60 per cent for the stock trading at Rs 163 levels.

KNR Constructions had continued with its outperformance even during the June quarter in terms of execution by reporting revenue growth, against a decline expected by analysts. Factoring in the strong Q1FY21 showing, analysts at Motilal Oswal Financial Services had increased their FY21 and FY22 earnings estimates 28 and 7 per cent, respectively, and the target price to Rs 295 for the stock trading at Rs 247.30.

Among others, confidence in Dilip Buildcon has increased from a better-than-expected June quarter performance and rising order flows. Nomura values the stock at 8.5x FY22 EPS and adds BOT (build, operate, and transfer)/HAM investments at book value to arrive at the target price of Rs 500 (the current price is Rs 349).

For Kalpataru Power, improving balance sheet metrics and steady medium-term visibility, along with a strong long-term pipeline of railway and T&D orders bodes well as the stock is trading at attractive 7.3x its FY22 earnings, according to Emkay Research estimates.