Improving signals for road sector companies with 25% budget boost for FY24

Given high competition, firms with ability to monetise projects, focus on high margin assets and healthy balance sheets are preferred plays

The Budget for FY24 has increased road outlay by 25 per cent year-on-year, invigorating stakeholders in the roads sector. However, unseasonal rains have led to reduced activity, and the volume of awarded projects has also declined.

Year-to-date awards for FY24 stand at 1,756 km, a decrease from 2,706 km during the same period in FY23. These awards have predominantly been led by the Ministry of Road Transport and Highways (MoRTH), as the National Highways Authority of India (NHAI) has contributed just 10 per cent to the total. By comparison, total road awards in FY23 amounted to 12,375 km, with NHAI responsible for 6,310 km.

Construction year-to-date in FY24 is at 3,196 km, showing an increase from 2,921 km in the corresponding period in FY23. The ministry aims to raise the construction target for FY24 to 13,800 km at an average rate of 40 km per day, up from the previous target of 12,500 km.

Aside from new and ongoing projects, asset transfers also contribute to sector activity. Although quick monetisation of projects is beneficial and is reflected in bank sanctions, it doesn't necessarily indicate new capital expenditure (capex).

In the cost dimension, commodity prices have eased, but intense competition continues to narrow margins. The Reserve Bank of India's (RBI) decision to pause interest rate hikes sends a positive signal to this capital-intensive sector. Credit availability seems sufficient.

Major players in the sector are predominantly mid-sized or smaller. IRB Infrastructure Developers leads the pack with an asset base exceeding Rs 70,000 crore across 11 states. With a diverse project portfolio, the company's order book stands at Rs 33,700 crore for Q1FY24, which could lead to a revenue compound annual growth rate (CAGR) of 13 per cent from FY23 to FY25.

Other notable firms include Ashoka Buildcon, KNR Constructions, and PNC Infratech. In a fiercely competitive environment, the ability to quickly monetise projects and maintain healthy balance sheets could be decisive.

Ashoka Buildcon expects a cash inflow from asset monetisation exceeding its current market capitalisation, and holds a diversified order book valued at Rs 15,810 crore. KNR Constructions boasts a debt-free balance sheet with cash reserves of Rs 85 crore and is actively seeking to monetise existing Hybrid Annuity Model (HAM) projects. PNC Infratech holds an order book valued at Rs 18,900 crore and has a strong balance sheet with a net debt-to-equity ratio of 0.17x.