New government to boost infrastructure sector, but expect some hurdles

The General Elections inevitably led to a slowdown in government projects through Q4FY24 and Q1FY25 with muted activity. The installation of a coalition could mean changes in policy focus which will only become apparent as and when the FY25 full year Budget is announced. The market was banking on strong rumours that the last government had put together a 100-day plan to accelerate the thrust on infrastructure spending and on defence production.

Assuming some version of that 100-day plan is rolled out, it could lead to a bounce in activity across roads, and renewable power in particular. In addition, some analysts are pointing to a possible revival in private sector capex, given signs that this was on the cards in late FY24.

After two weak quarters due to the election effect, construction and engineering firms would welcome revival in activity and there would be several beneficiaries. Moreover, upstream suppliers of materials like cement, steel, and other building materials could be beneficiaries. This would typically mean a strong Q2FY25 and H2FY25 for companies like L&T, IRB Infrastructure, Hindustan Aeronautics, NCC and J Kumar Infra and investors betting on the return to political continuity could see re-ratings.

Core sector growth rose to 6.1 per cent YoY in Apr’24 over Apr’23, as every sector except fertilisers and cement saw strong growth. Fertilisers suffered from base effect (Apr’23 was up 24 per cent). Cement also saw a base effect though Apr’24 was up 0.6 per cent over Apr’23 which was up 10.6 pr cent – there was also a slowdown in offtake due to the elections.

Renewables were one area where corporates (including PSUs) and also states and Central government continued to invest through the last six months. Private capex also came into the electronics and automobiles sectors, in both cases driven to some extent by PLI schemes. Airport renewal and greenfield construction is another potential area of opportunity where private capex inflows are evident. As a new government takes charge, there’s likely to be a pickup in shelved roads projects (by both states and the Centre) and in conventional power and in Railways.

NCC and L&T are two big players with sizeable order books who would be beneficiaries from acceleration. Both are diversified across engineering sectors and geographies. Within road sector itself, construction companies like HG Infra and PNC Infra have both successfully instituted asset monetisation programmes. HG has looked for orders from metros, and in solar energy and may be targeting upto 50 per cent of orders from outside the roads sector. Other road players like GR Infra and KNR Constructions are hoping for better order inflow as activity picks up. GR Infra has also transferred several assets to its InvIT improving financials. KNR Constructions has significant receivables outstanding from irrigation works, and PNR Infratech has received some arbitration awards but suffered from low execution in Q4FY24.

L&T, NCC and HG Infra all have revenue growth guidances of around 15 per cent. PNC Infra has a revenue guidance of 10 per cent. GR Infra expects flat FY25 revenue as does KNR. All of them expect significant order flows for FY25 and beyond. This is a very capital-intensive sector so slowdowns lead to financial stresses.

As activity picks up, investors must watch however for margins being shaved if bidding becomes too competitive. The road sector has run into problems before. Low margins due to strong competition could affect profitability across the sector.