Stimulus 3.0: Construction, infra firms on concrete road to recovery

Recent policy measures on liquidity add to improving outlook led by better execution, good order flows, and low interest rates

The government’s stimulus 3.0 is expected to strengthen the already improving prospects of construction and infrastructure players. These announcements will lead to higher liquidity and lower working capital requirement for construction firms, say analysts. 

Among major initiatives, entities are likely to gain from the relaxation in performance security (reduced from 5-10 per cent to 3 per cent) for both existing and new contracts — from the Centre and public sector enterprises — leading to lower working capital needs. Contractors will benefit more, if states follow suit. Funding requirement will also ease owing to the reduction/removal of earnest money deposit for new tenders. The reduced balance sheet burden will, in turn, improve the health and execution abilities of infrastructure players. 

IIFL says smaller players with weak balance sheets can also compete harder now. Additional budgetary outlay for industrial and capital expenditure (capex) will also aid capex spends, thereby benefitting construction contractors in order flows. Private capex, which had been sluggish, was further hit by cost-cutting measures adopted by companies during the lockdown, thus delaying expansion plans. 

Key stocks to be monitored are Larsen & Toubro (L&T), NCC, Ahluwalia Contracts, Capacite Infraprojects, JMC Projects, KEC International, and Kalpataru Power, according to IIFL analysts. While the measures come as a shot in the arm, the sector has already seen an improvement in prospects. 

Order flows have beaten expectations during the first half (H1FY21), helped by the NHAI, with most road construction players seeing a surge in their order books. Project execution, too, picked up pace following the easing of the lockdown, with improved labour availability and the end of the monsoon. Alok Deora of YES Securities says prospects for all construction majors have improved significantly in H2FY21. Consequently, analysts not only expect performance to improve over H1 but also be better than the year-ago period, thanks to pent-up execution. Among stocks, Deora likes PNC Infratech, KNR Constructions, Dilip Buildcon, and Capacite Infraprojects. KNR and PNC Infra appear among the top picks of Emkay Research, too, which is bullish on L&T as well as Kalpataru Power.

L&T, which is well-diversified, has significant presence in the engineering and construction (E&C) segment. Though its order book growth and performance remained sluggish in H1, order wins worth Rs 33,000 crore for the Mumbai-Ahmedabad high-speed rail project in October boosted prospects. 

Analysts at Motilal Finacial Services (MOFL) expect L&T to emerge stronger in the post-Covid era and consolidate its market share in the Indian construction industry further. PNC Infra, which secured Rs 3,000 crore in new orders, saw its book rise to Rs 15,500 crore (3x its FY20 revenues) at the end of H1. Its management expects Rs 7,000 crore worth of orders in FY21. 

Finding comfort in the higher pace of execution and order additions, the PNC Infra management has guided for a year-on-year increase in revenues for FY21. 

Analysts at Anand Rathi say the ‘recent-wins-driven’ augmented revenue assurance, and a gradual return to execution efficiency, indicates that PNC Infra is set to sail towards growth again.

Prospects also remain strong for Dilip Buildcon, which has bagged significant orders in FY21. Its total order book, at Rs 25,620 crore, is much better than the Rs 19,080 crore in FY20. The firm is expected to monetise some of its HAM (hybrid annuity model) projects in the December quarter, which will release some equity and allow it to take up new projects.

KNR has turned cash-positive thanks to the sale of its BOT (build-operate-transfer) road assets. This, along with its strong order book (3.2x revenues) has led to an upward revision in earnings estimates. MOFL, for instance, has raised its FY21 and FY22 earnings estimate by up to 6 per cent. Kalpataru, on the other hand, saw international transmission and distribution (T&D) orders in the current financial year driving its Q2 order inflows of Rs 3,200 crore. Excluding L1 orders (lowest-bidder status), the order book is at Rs 13,000 crore or 1.6x its FY20 revenues. The company expects its annual order inflow guidance of Rs 9,000-10,000 crore to be met from a pick-up in domestic T&D, BOT roads, and railways segments. 

Overall, the outlook for construction and infrastructure firms, on order flows and execution, has significantly improved. HSBC said recently that with most economic indicators returning to normal, and government finances reaching pre-Covid levels — as indicated by GST collections — capex will follow soon.