 "Promising road ahead for infra firms")
IRB Infrastructure, Sadbhav Engineering, PNR Construction, Gayatri Projects, IL&FS Transportation and Ashoka Buildcon have something in common. They are among the few infrastructure construction companies which have seen a spurt in their order book in the road projects segment over recent months.
Their stocks are still down as compared to a few months earlier, following the correction in broader markets. Some of it is due to profit booking, following the run-up in the past months. Some were also not able to meet their earnings estimates in the quarter ending June, first in this financial year (Q1) and this might have disappointed their investors. For instance, only eight of 20 companies saw a rise in net revenue as compared to Q1 in 2014-15.
IRB Infra, Sadbhav Engineering, Simplex Infra and Gayatri Projects saw an improvement from the year before period's performance. However, some of the larger entities such as Gammon India, IVRCL, Punj Lloyd and IL&FS Transportation continue to face challenges at operation levels. Delays in order execution and the resulting impact on operating costs and interest payouts are some challenges.
The bad news, though, ends there. After the stock correction, valuation of many of these companies has turned attractive. Coupled with the sector's improving prospects, this suggests it could be a good time to accumulate some of these. Among the top picks are Ahluwalia Contracts, Ashoka Buildcon, IRB Infra, Sadbhav Engineering, ITD Cementation and KNR Constructions (see table).
The bright spot for the sector is improving of revenue visibility, likely to work in favour of these companies in the quarters to follow. In August, projects worth Rs 7,984 crore were awarded, a 73 per cent jump from the year-ago period's numbers. Also, of the 8,221 government tenders published in the past three months, roadway projects are 35 per cent, Rs 55,000 crore in value terms.
Another positive is that of the 150 projects awarded by the government across the infrastructure sector, Indian companies have managed to keep a majority (95 contracts). National Highways Authority of India's eight contracts alone account for 80 per cent of the total value (Rs 7,212 crore) of contracts awarded in the roadways sector during August.
Heightened competition in the bidding process, though, might restrict the gains. Emkay Global notes of 20 projects awarded so far, nine bids were at a discount of 2.5 per cent to 20 per cent to the benchmark cost. Only two projects were bid at the benchmark cost; nine were bid at a premium of 2.5-15 per cent. Ambit Capital, too, noted that the continued aggression, particularly in BOT projects, remains a risk to the profitable growth of road developers.
These issues might be addressed if order inflows in the sector gain further momentum, in line with the government target of achieving 20 km of road laying every day.
On the whole, given the surge in order inflow and tenders called for, as well as the policy reforms, analysts expect road and highway developers to perform better than other entities in the infrastructure segment. Whether these companies succeed in keeping costs in check will be critical to ensure profitability in operations.
Their stocks are still down as compared to a few months earlier, following the correction in broader markets. Some of it is due to profit booking, following the run-up in the past months. Some were also not able to meet their earnings estimates in the quarter ending June, first in this financial year (Q1) and this might have disappointed their investors. For instance, only eight of 20 companies saw a rise in net revenue as compared to Q1 in 2014-15.
IRB Infra, Sadbhav Engineering, Simplex Infra and Gayatri Projects saw an improvement from the year before period's performance. However, some of the larger entities such as Gammon India, IVRCL, Punj Lloyd and IL&FS Transportation continue to face challenges at operation levels. Delays in order execution and the resulting impact on operating costs and interest payouts are some challenges.
The bad news, though, ends there. After the stock correction, valuation of many of these companies has turned attractive. Coupled with the sector's improving prospects, this suggests it could be a good time to accumulate some of these. Among the top picks are Ahluwalia Contracts, Ashoka Buildcon, IRB Infra, Sadbhav Engineering, ITD Cementation and KNR Constructions (see table).
The bright spot for the sector is improving of revenue visibility, likely to work in favour of these companies in the quarters to follow. In August, projects worth Rs 7,984 crore were awarded, a 73 per cent jump from the year-ago period's numbers. Also, of the 8,221 government tenders published in the past three months, roadway projects are 35 per cent, Rs 55,000 crore in value terms.
Another positive is that of the 150 projects awarded by the government across the infrastructure sector, Indian companies have managed to keep a majority (95 contracts). National Highways Authority of India's eight contracts alone account for 80 per cent of the total value (Rs 7,212 crore) of contracts awarded in the roadways sector during August.
Heightened competition in the bidding process, though, might restrict the gains. Emkay Global notes of 20 projects awarded so far, nine bids were at a discount of 2.5 per cent to 20 per cent to the benchmark cost. Only two projects were bid at the benchmark cost; nine were bid at a premium of 2.5-15 per cent. Ambit Capital, too, noted that the continued aggression, particularly in BOT projects, remains a risk to the profitable growth of road developers.
These issues might be addressed if order inflows in the sector gain further momentum, in line with the government target of achieving 20 km of road laying every day.
On the whole, given the surge in order inflow and tenders called for, as well as the policy reforms, analysts expect road and highway developers to perform better than other entities in the infrastructure segment. Whether these companies succeed in keeping costs in check will be critical to ensure profitability in operations.