Diversified EPC players well placed in March qtr on strong capex momentum

The infrastructure sector may have done well in the fourth quarter of 2024-25 (Q4FY25) with capital expenditure (capex) by the central government up 48 per cent year-on-year (Y-o-Y) in Q3FY25, and the momentum maintained in Q4FY25.

 

State capex is also going up with a focus on irrigation and water supply with new project announcements by Andhra Pradesh and Maharashtra, for example. New awards across sectors like roads, buildings, marine, metro, minerals, transmission and distribution, water, and telecom seem to have been good for diversified engineering procurement and construction (EPC) plays.

 

The Union Budget for FY26 indicates around 8 per cent nominal increase in expenditures across key ministries over the revised estimates (RE) for FY25.

 

Housing, renewables, conventional power, shipping, and water resources are among sectors where double-digit increases in allocation have been marked. FY26 budget estimates (BE) projects around ₹7.4 trillion in central infrastructure outlays versus RE of ₹6.8 trillion for FY25.

 

There are also signs of capacity enhancements by large conglomerates which may translate into business for engineering and construction. In the overseas market, projects from West Asia are buoyant.

 

Broadly, the infrastructure universe should see low teens revenue growth across FY24-27, which may mean slightly higher mid-teens earnings growth.  

 

Valuations are reasonable for many players and diversified EPC companies such as National Construction Company (NCC), Afcons Infrastructure, Larsen & Toubro (L&T), and Hindustan Construction Company (HCC). They have mostly seen healthy order flows and in many cases, beaten their own order inflow guidance.

 

In L&T’s case, inflows were driven by international orders, which comprised 60 per cent of total announcements, with a massive order in the hydrocarbon division from Qatar.

 

For NCC, order inflows were led by Bharat Sanchar Nigam Limited and the transportation division, which contributed 53 per cent and 33 per cent, respectively.

 

Afcons had an inflow of ₹2,300 crore in Q4 and has pending lowest cost (L1) status on orders of ₹14,100 crore, which are delayed due to land acquisitions.

 

However, while diversified EPC has done well, road-focused EPC companies such as PNC Infratech, HG Infra, and Ashoka Buildcon may have underachieved with close to the lower end of guidance or below.

 

Although the new project announcements were healthy, delay in receipt of appointed dates, land acquisition approvals, and payments from government authorities may have impacted execution in Q4FY25.

 

About 82 per cent of the total project awarding worth ₹1.2 trillion by the Maharashtra government is yet to be converted into a letter of authorisation.

 

Slow execution in what was usually a strong quarter (hence high base) may have led to small revenue declines on average, and cash flow issues due to delayed payments. A probable exception is HG Infrastructure, which had positive Y-o-Y growth due to major contributions from solar projects. 

 

On average, operating profit margins are likely to be range-bound at around 10-11 per cent on account of stable prices of key materials like steel and cement.

 

Praj Industries has to await a government policy decision on increasing the ethanol blending rate before analysts can project likely future growth and margins. The ethanol blending rate has reached 19.5-20 per cent, largely led by grain-based ethanol. A policy hike to E25 blending would open up new orders for Praj.

 

Road projects continue to see high competitive intensity: The first nine months of the FY25 award book was 4,204 kilometres (km) (flat Y-o-Y). 

 

But in January, the Ministry of Road Transport and Highways awarded 1,104 km (up 108 per cent Y-o-Y). But competitive intensity kept bids much lower and small. Unlisted EPC players were among beneficiaries. The authority is working to tighten bidding rules which may benefit players with more resources.