EPC players in fast lane on infra push

Can double m-cap in 3 years with opportunity to scale-up business: Analysts

There has been a lot of talk about the potential in India’s infrastructure sector. But, according to analysts, all eyes are on the road sector, anticipating a strong order inflow.

Given the projects that are lined up and the focus on increasing the pace of road construction, there is still a lot of steam left in the road construction stocks.

Even as expectations were high that the second half of 2017-18 would see strong order inflow, announcement of the Bharatmala project last month has buoyed prospects.

For the roads sector, the government’s infrastructure development focus, including the Bharatmala project, is nothing short of a booster dose, said analysts at IIFL.

The project is likely to remain a significant driver for order flows and analysts see better days ahead for companies. After the announcement, the National Highways Authority of India (NHAI) has revised its FY18 road award targets to 10,000 km from 6,500 km, and its project pipeline is worth over Rs 50,000 crore (analysts’ estimates).

Bids for these are to be submitted by January 2018.

An improvement in the pace of awards points to a possibility of scaling up, said analysts. At 4,500 km static ordering run-rate of NHAI, players have started picking up and choosing projects, and a 50-100 per cent scale-up in ordering will make an average bidder (more than 50 in the race) bag Rs 2,000-3,000 crore of orders per annum, analysts at Kotak Institutional Equities said. So, the brokerage believes that the (stock price) rally is more credible this time and may have just begun as they see enablers for a sustained uptick in ordering of projects, which was missing in the euphoric times of FY15.

The pace of execution has started picking up. The second quarter growth reported by most companies indicates that the execution rate remains strong, said Yellappu Santosh at India Nivesh, who, however, feels that faster land acquisition and clearances remain crucial.

Within roads, the engineering, procurement and construction (EPC) companies are seen as major beneficiaries of the increase in orders.

EPC contracts are typically faster to begin construction (in two-three months) compared to the hybrid annuity model projects, where construction starts only after a financial closure that takes six months or more. While the hybrid annuity model was the priority in terms of projects awarding at the start of FY18, the focus has now shifted to EPC in the near-term, analysts observed.

EPC is expected to form 80 per cent of the total bid pipeline in next two-three quarters, analysts at IIFL said. Kotak, too, says there is visibility of medium-term opportunities and good history of return on capital employed across the board, reaffirming the self-funding nature of the EPC business. The brokerage believes most EPC players can double their market capitalisation over the next three years based on their ability to grow capital employed.