Analysts pick road-construction stocks on strong order book, NHAI pipeline

With the road and transport ministry (MoRTH) seeing a 36 per cent increase in Budget allocation for financial year 2023-24 (FY24), related-stocks are eyeing robust growth outlook in the long term, believe analysts.

At the bourses, shares of HG Infra Engineering, KNR Constructions, and KEC International have surged up to 9.3 per cent since February 1, ACE Equity data shows. Moreover, over the past one year, shares of IRB Infrastructure, NCC, HG Infra, PNC Infratech, and KEC International advanced up to 50 per cent, as against a 6.4 per cent irbrise in the S&P BSE Sensex.

“We believe road-construction related stocks will benefit from higher Budget 2023 allocation, due to strong order book inflows. Some of the key factors that will benefit the sector are strong NHAI (National Highways Authority of India) pipeline of over Rs 1 trillion, declining commodity prices, and reduced competitive intensity with respect to HAM (hybrid annuity model) projects,” said Uttam Kumar Srimal, senior research analyst, Axis Securities.

Out of the total allocation of Rs 2.7 trillion earmarked to MoRTH, the NHAI has been allocated around Rs 1.6 trillion, as part of the ministry's capex plan for 2023-24. The Centre has given itself a target of adding over 12,000 kilometers in the highway network in FY23, though it has constructed 6,803 km of highways so far this year. In the prior fiscal (FY22), NHAI had constructed 10,458 km of highways.

Order book and road ahead

Order inflow for road-dependent players rose up to 5 per cent year-on-year (YoY) to Rs 25,700 crore in the October-December quarter of FY23 (Q3FY23). Besides, road awards picked up in January, translating into 22 per cent YoY growth during 10MFY23 versus 2 per cent in 8MFY23.

“A sharp surge of awards was seen in December 2022, which amounted to Rs 1.9 trillion – strongest seen in the last three quarters. With this, the nine-month awards stood at Rs 5.2 trillion, and makes up around 96 per cent of FY22 awards,” said Narendra Solanki, Head Fundamental Research – Investment Services, Anand Rathi Shares & Stock Brokers.

Analysts believe that the strong award order would provide a big fillip to related-players in the sector like PNC Infratech, HG Infra, and KNR Construction, for the long-term horizon.

That said, highway awards in February-March would be critical to watch out for, in order to meet the companies' target for fresh inflows, they said.

Overall, infrastructure companies reported a sturdy picture in Q3FY23 – in-line with Street estimates. Despite the marginal impact of prolonged monsoons in parts of India, analysts at Phillip Capital observed strong execution by companies, with a healthy top-line growth in YoY terms.

“The fundamentals are strong (balance sheets, order books), execution activity is picking up, and order award momentum remains healthy. Margins are expected to pick-up further Q4 onwards, on the back of pass-through clauses and new projects being won at higher input costs. All along, stocks are currently trading at highly attractive valuations. We expect the sector stock to deliver significant returns over the next 12-18 months. We maintain PNC Infratech as our top pick, followed by HG Infra, NCC, KNR,” the brokerage firm added.