Analysts bullish on road, highway developers on infra push, cheap valuation

Analysts remain positive on the road/construction sector given healthy order books providing good revenue visibility, controlled working capital, value unlocking

The cheap valuations of road and highway developers and the government’s focus on infrastructure development has caught investors’ fancy. As a result, some of these stocks have surged as much as 40 per cent in the past six months.

Shares of HG Infra Engineering, for instance, have rallied 45.6 per cent during the period, while those of IRB Infrastructure Developers, KNR Constructions, and L&T gained between 25 per cent and 40.5 per cent, ACE Equity data shows.

In comparison, the benchmark S&P BSE Sensex has zoomed 14 per cent and the broader S&P BSE500 index has rallied 13 per cent during the period.

However, most of these stocks have declined 22-35 per cent from their recent peak, except KNR Construction (which is down about 10 per cent), despite decent inflows in the sector and healthy tendering activity, point out analysts. This, they say, makes valuations of select players attractive.

“HG Infra and PNC are trading at below 10x standalone earnings on FY23E numbers. While we have assumed 1x for investments in subsidiaries/associates/JV, even if we assume 0.5x, valuations of these stocks would remain attractive. KNR trades at 16.7x FY23E standalone earnings, largely because of its diversified order book and expectations that it would be able to churn assets at the right price,” note Abhineet Anand and Abhishek Mody, research analysts at Emkay Global.

For GR Infra, KNR Construction, PNC Infra, HG Infra, and Dilip Buildcon, the order book saw a two-year compound annual growth rate (CAGR) of around 13 per cent at the end of the first half of financial year 2021-22 (H1FY22) and about 9 per cent growth year-on-year (YoY), shows Anand and Mody’s analysis. Ashoka Buildcon (26 per cent), PNC (16 per cent), and HG Infra (13 per cent), meanwhile, witnessed decent order book growth on a two-year CAGR basis.

“During April-November, roads have seen significant ordering compared to the same period last fiscal. Growth is in excess of 100 per cent, though Q4FY21 was very strong. From the tendering perspective, growth for this period stood at 12 per cent YoY. This clearly signifies that the momentum in ordering will continue,” they say.

However, cumulative road construction activity was down 18 per cent YoY at 5,118 kms during the period.

“The second wave affected road construction activities in April-May. As a result, the pace of road construction has remained down. Increased steel, cement and tar prices, incessant rains in various parts of the country, and sand unavailability have affected road construction activities. That said, we expect a sharp uptick in construction activities in Q4FY22 as multiple HAM (hybrid annuity model) projects have received appointed dates recently,” said Mangesh Bhadang, research analyst at Nirmal Bang.

The Ministry of Road Transport and Highways (MoRTH) has planned investments worth Rs 6 trillion in the highways segment by FY24.

However, unlisted developers are eating into the market share of listed players, which remains a concern. From an average of 60 per cent over FY10-12, the market share for listed developers declined to 48 per cent over FY13-15. It increased to 61 per cent over FY16-18, but then fell to 30 per cent over FY19-21. In fact, the current fiscal has seen their aggregate market share fall to as low as 21 per cent, shows an analysis by Edelweiss Securities.

“Intensifying competition and dilution of pre-qualification norms post Covid-19 has dragged market shares of listed developers… While listed developers are expecting the norms to be tightened soon, the looming third wave might dash their hopes. We believe the NHAI would take action only after receiving market feedback on financial closure of HAM projects,” the brokerage said.

Going ahead, analysts remain positive on the sector given healthy order books, controlled working capital, value unlocking through sale of operational road assets, and reasonable valuations.

Nirmal Bang is bullish on KNR Construction and PNC Infra; Edelweiss Securities likes KNR Constructions, PNC Infra, and G R Infra; and, Axis Securities and Emkay Global prefer HG Infra Engineering.