Road construction relaxation not enough to buy related stocks, say analysts

As Prime Minister Narendra Modi announced the extension of the nationwide lockdown till May 3 to stem the spread of coronavirus (Covid-19) pandemic, the halt in construction of national highways had entered an uncertain territory. Most analysts now find it hard to chalk-out a timeline for normalisation of operations, thus making them pessimistic on the near-term outlook for road developers. While the government has allowed construction of roads, availability of labour could still be an issue, analysts say.
 

“The relaxation will not help many of the listed players and it will be a while before activity begins for them. There coud be labour-related issues,” says Ambareesh Baliga, an independent market analyst.


 

The relaxation in lockdown guidelines, announced on Wednesday, April 15, permit construction falling outside the limits of the municipal corporations. Further, continuation of construction projects will be allowed from April 20, falling within the limits of municipal corporations, where workers are available on site.
 

Bhupendra Tiwary, research analyst at ICICI Securities expects labour unavailability to persist even after the lockdown is lifted, as it could take time for their re-mobilisation. Also, even if the work at project sites resumes within one or two weeks post the lockdown, the onset of the monsoon season from Q2FY20E could slow down execution, going ahead, he says. 

On their part, National Highways Authority of India (NHAI) has so far not set any target for the construction of the national highways in fiscal year 2020-21 (FY21) due to uncertainty.

“Ministry of Road Transport and Highways has requested state governments to lift restriction on construction activities in less impacted Covid-19 regions. The onus, however, will be on state governments to come out with the policy on how work needs to be carried out while maintaining social distancing. While we expect the utilization of work force at around 15-20 per cent, and the pace could hit 100 per cent by June or July,” say analysts at HDFC Securities Institutional Research

Projects stuck

The pandemic has also cast shadow on the government’s ambitious Rs 102 trillion National Infrastructure Pipeline (NIP), says Amar Kedia, research analyst at Emkay Global Financial Services, who believes that the spending under the proposal may, at best, restrict to Rs 73 trillion.

“We expect a best-case scenario of Rs 73 trillion to be spent under the NIP. While innovative models such as InvITs, Toll-Operate-Transfer (ToT) and multi-lateral funding are increasingly being used to partly fund the capex needs, we believe this will remain miniscule and a majority of the funding will have to be brought in by the government,” he says.

At the bourses, stocks have been hammered up to 65 per cent so far in calendar year 2020 (CY20). Ashoka Buildcon, IRB Infrastructure Developers, PNC Infratech, Dilip Buildcon and Sadbhav Infra have crashed between 44 and 65 per cent till April 9. In comparison, the S&P BSE Sensex has tanked 24.46 per cent.

Investment strategy

Given the uncertain environment, analysts suggest sticking to firms with stronger balance sheets, realistic targets, low debt levels, good corporate governance, well managed working capital cycle and high book to bill ratio.

HDFC Securities believes players like Sadbhav Infra, Ashoka Buildcon, PNC Infratech, and Larsen and Toubro will be at advantageous position due to the sector being given relaxation under the guidelines.

Meanwhile, Prabhudas Lilladher assumes a revenue loss of three months in FY21E in order to account for a nationwide lockdown which has resulted into earnings cut of 49.5 per cent/14.7 per cent in FY21E/FY22E. They prefer KNR Constructions, PNC Infratech and HG Infra.

“While all companies are available at dirt cheap valuations, we bear in mind that challenges remain for companies, going ahead. We prefer companies like KNR Constructions and PNC Infratech given the lower working capital and debt levels. With vulnerability in operations, we keep the ratings and target price under review for NCC and Ashoka Buildcon, but suggest investors avoid the counters for the time being,” says Tiwary of ICICI Securities.