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Action in the roads sector is likely to pick up in FY16, with the government planning to award 20,000 km (for development) over the next two years. A majority of these projects will be awarded under the engineering, procurement & construction (EPC) model, as developers are reluctant to bid under private-public partnership.
For FY16, the government has allocated Rs 40,000 crore for road development. Renewed activity in the segment should, therefore, throw up investment opportunity for investors. With competition picking up among regional entities for such EPC contracts, analysts caution investors against developers with stretched balance-sheets. While several developers such as IRB, ITNL, KNR Constructions, Sadbhav Engineering and Ashoka Buildcon stand to benefit from higher ordering, analysts prefer Sadbhav and Ashoka.
Ambit Capital has urged investors to avoid attractively-valued companies with poor balance-sheets and stick to high-quality developers. “We suggest Ashoka Buildcon (with a potential upside of 39 per cent) and Sadbhav Engineering (14 per cent potential upside) to play the sector’s recovery.”
Over six months, shares of Sadbhav have risen 66.21 per cent, while Ashoka Buildcon’s increased 52.56 per cent. Ashoka and Sadbhav have a portfolio of tolling roads, which would improve cash flows once economic activity picks up. Ashoka’s operational road assets have a higher revenue potential as they are mature road assets compared to Sadbhav’s.
Sadbhav owns 12 road assets (Rs 1,500 crore equity investments and 3,568 lane kms), while Ashoka owns eight road assets (Rs 1,400 crore equity investments and 3,309 lane kms). Currently, 90 per cent of Ashoka’s road portfolio is collecting toll, says Ambit. Ashoka also has a strong balance sheet, with a debt/equity ratio (standalone) at 0.2 times and 2.5 times consolidated. Sadbhav’s standalone debt/equity ratio is 1.1 times and consolidated is 3.8 times. Funding new equity would be easy for Ashoka.
Sadbhav has a better commercial traffic mix than Ashoka. Spark Capital says: “Sadbhav’s key projects are present in the western/north western region, which places it better than Ashoka’s key projects being around Odisha, where there is uncertainty related to the temporary iron ore mining-ban.”
For those looking for further details, one only needs to look at the Sadbhav’s Aurangabad road registered 31 per cent traffic growth in the first nine months of FY15 due to higher economic activity. While both companies are best placed to gain from the rising activity levels in the sector, analysts see a bigger upside in Ashoka.
