Analysts bet on EPC firms in road infra

Players with a strong balance sheet, execution track record, and robust asset portfolio would be key beneficiaries

The infrastructure sector remains in a sweet spot given the government’s focus on awarding new projects and ramping up execution of existing ones, especially in the roads segment. The announcement on the Bharatmala scheme in October-end has only provided fresh triggers. Analysts at Motilal Oswal Securities (MOSL) say for the past three years, the government has been ironing out issues, which have been hampering the roads sector. It has cleared bottlenecks through suitable policy changes and there are early signs of revival in the sector for some time now. Players with a strong balance sheet, execution track record, and robust asset portfolio would be the key beneficiaries. With focus on faster implementation of contracts, analysts feel the EPC or engineering, procurement and construction projects are better-placed to reap benefits. Analysts at Kotak Securities say their positive bias for the sector continues with preference towards EPC companies such as Simplex Infrastructures, NCC, KNR Constructions and PNC Infratech. MOSL’s top picks include Sadbhav Engineering, Ashoka Buildcon, IRB Infrastructure and KNR Constructions, while IIFL prefers Sadbhav Engineering, Dilip Buildcon, PNC Infratech and KNR Constructions. Here’s how some of the top companies stand.

KNR Constructions is a top pick of all the above-mentioned brokerages. Engaged in construction of roads and highways, KNR has a strong track record of generating positive operating cash flows, a low net debt-equity of 0.1x and has consistently been reporting healthy margins. A robust order backlog or pending orders of Rs 3,590 crore provides revenue growth visibility of two-three years. With the focus mainly on EPC, the gains are expected to be large, say analysts, who expect KNR’s earnings growth to be strong with benefits emanating from increased scale of operations and an order book with a good chunk of high-margin projects.

Sadbhav Engineering’s current order book of around Rs 7,710 crore (2.3x its FY17 revenues), which mainly comprises of road projects, provides strong revenue visibility. What’s more, another Rs 6,000 crore of orders are expected in the remaining months of FY18. Moreover, its BOT (build-operate-transfer) projects, too, are providing stable cash flows now, say analysts, and would improve the company’s project execution capacity. In this backdrop, IIFL expects the company’s top line and earnings to grow annually at 19 per cent and 22 per cent, respectively, during FY17-20. While a strong balance sheet and execution track record provide comfort, Kotak Securities says with its diverse expertise, the company is well set to capitalise on the upcoming opportunities in roads, metros, affordable housing as well as industrial order inflows.

PNC Infratech is not far behind in the list. It has a large order book of Rs 11,000 crore. A robust pipeline of orders, specifically in the roads space gives strong revenue growth visibility for the next five years, say analysts at Kotak Securities. The company, however, has lagged in execution during the first half of FY18. But, nearly all the projects should start contributing by the March 2018 quarter, say analysts at IIFL, who expect a strong growth in revenues for the company, both during FY19 and FY20.

Amongst others, the confidence towards Ashoka Buildcon stems from the company’s well-funded balance sheet. This would enable the company to benefit from upcoming opportunities in the roads sector. Like its peers, Ashoka Buildcon’s order book is also healthy. MOSL says this lends confidence to EPC revenues, which they expect to grow annually by 19 per cent over FY17-19.

Some others not to miss 

For India’s largest roads operator, IRB Infrastructure, its mature road projects provide comfort on near- to medium-term earnings and cash flows. Recently commissioned and under-construction projects only add to this visibility, say analysts. Given the current portfolio and new projects going on stream, MOSL expects the company’s revenues to grow at 

26 per cent annually over FY17-19, and earnings by eight per cent during this period. 

For NCC, a healthy order book and stable margins should help the company clock a compounded annual growth of 10 per cent in revenues and 25 per cent in reported profits over FY17-19, say analysts at Kotak Securities. Its debt position is also reasonably healthy, which should help the company tap upcoming opportunities.

Even as the current order book to FY17 sales is healthy at 2.8 times, Dilip Buildcon expects a whopping Rs 10,000 crore in new orders during FY18. These will be mainly driven by the roads segment. The recent sale of its BOT portfolio at 1.05 times the book value will result in cash inflow of Rs 700 crore, and commensurate reduction in the company’s standalone debt. All these, along with a gradual improvement in working capital, should keep return ratios elevated, say analysts.

Source: IIFL Research