Roadways: IRB, Sadbhav, Ashoka remain top picks

The announcements by the Cabinet Committee on Economic Affairs (CCEA) on Wednesday are likely to provide much-needed support to road construction companies.

First, the government has authorised National Highways Authority of India (NHAI) to compensate developers in case of a delay in projects, if this is not attributable to the developers. This would benefit 34 projects, stuck at various stages. Analysts indicate that projects of Gammon India, Madhucon Projects and Hindustan Construction Company, caught at the construction stage, are likely to be the biggest beneficiaries.

Also, CCEA has authorised NHAI to extend the concession period for all toll projects operating in the build, operate and transfer (BOT) mode which suffered losses during construction for reasons not attributable to the developers.

These announcements are viewed by sector observers as progressive and catalytic and did cheer small-cap companies in the segment. The stock prices of  PNC Infratech, Gayatri Projects, Gammon India and Madhucon Projects rose between two and five per cent in trade on Thursday.

This apart, to fast-track highway projects, it was decided to allow the ministry of road transport and highways (MoRTH) to approve projects with civil construction cost up to Rs 1,000 crore. Earlier, these projects required clearances from multiple authorities.  

That said, larger road sector companies such as IRB Infrastructure, Sadbhav Engineering and Ashoka Buildcon did not appear too enthused. Adhidev Chattopadhyay of Elara Capital believes there are no major outcomes from these announcements for the larger entities in road construction. In the recent past, these have bid for projects upwards of Rs 2,500 crore on an average.

However, analysts also feel the Model Concession Agreement issued by MoRTH in September could have far-reaching implications on these companies.

The markets appear bullish on these larger players, irrespective of any positive impact from Wednesday's announcement. Aboutr 80 per cent of analysts polled on Bloomberg recommend a ‘buy’ on the stocks of IRB Infra, Sadbhav Engineering and Ashoka Buildcon. Macquarie Research in a recent report reaffirmed its ‘overweight’ recommendation on these companies.

Despite revenue declining by 10 per cent over a year in the September quarter for Sadbhav, it was noted by Macquarie that the company’s order book to bill ratio of 3.2 is one of the highest in the industry. Sadbhav has bagged four engineering procurement and construction (EPC) orders (13 per cent of all orders in value terms) awarded by NHAI so far in FY16.

However in terms of valuations, compared to the BSE Sensex currently trading at 20.23 times the 12-month trailing price to earnings multiple, these large entities appear expensive (IRB Infra at 55 times, Sadbhav at 55 and Ashoka Buildcon at 20 times, by Capitaline data).

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