KNR Constructions, Sadbhav Engineering among road infra space's top picks

The infrastructure sector remains in a sweet spot looking at the government's focus on ramping up execution, increasing project awards, and construction activities, especially in the road segment. The end-October announcement on the Bharatmala programme has set the ball rolling further now. Analysts at Motilal Oswal Securities (MOSL) say that for the past three years, the government has been ironing out issues hampering the road sector. It has cleared bottlenecks through suitable policy changes and early signs of revival in the sector have been evident for some time now. Players with strong balance sheets, execution track record, and robust asset portfolio would be the key beneficiaries. 

With the focus on faster implementation, analysts feel that engineering, procurement, and construction – or EPC – projects that are faster to begin construction are better placed to reap benefits. Analysts at Kotak Securities say that they continue to maintain their positive bias for the sector with a preference towards EPC companies like Simplex Infraprojects, NCC, KNR Construction, and PNC Infratech. MOSL's top picks include Sadbhav Engineering, Ashoka Buildcon, IRB Infrastructure, and KNR Construction. Some of these names are evident in the picks of IIFL, too, who prefer Sadbhav Engineering, Dilip Buildcon, PNC Infratech, and KNR Construction. 

Clearly, KNR Construction appears among the top picks of all the above-mentioned brokerages. KNR is engaged in the construction of roads and highways and has a strong track record of generating positive operating cash flows and low net debt-equity at 0.1x. A robust order backlog of Rs 3,590 crore already gives revenue growth visibility for the next two-three years. With KNR being mainly into the EPC side of the business, the gains are to be large, say analysts. KNR has been consistently reporting healthy margins and analysts say that earnings growth is likely to remain strong with benefits emanating from increased scale of operations and high-margin order book.

Sadbhav Engineering, too, appears often among the aforementioned top picks. As its order inflows are driven by the road segment (pick up in industry awards and reducing competition), the current order book of around Rs 7,710 crore (2.3xFY17 revenues) provides strong revenue visibility for the company. With another Rs 6,000 crore in orders expected in FY18, its BOT (build-operate-transfer) projects, too, are providing stable cash flows now, say analysts, and would improve execution capacity. IIFL expects the company's top-line and earnings to grow 19 and 22 per cent annually, respectively, between FY17 and FY20. Kotak Securities says that with its diverse expertise, the company is well set to capitalise on the upcoming opportunities in roads, metros, and affordable housing, as well as industrial order inflows.

At least two brokerages remain bullish on PNC Infratech. Analysts at Kotak Securities say that PNC has a robust current order book of Rs 11,000 crore and has a robust pipeline of orders, specifically in the road space, which gives strong revenue growth visibility for the next five years. The company, however, has lagged in execution during the first half of FY18. Almost all the projects should start contributing by the March quarter, say analysts at IIFL. They also expect strong top-line growth for the company during FY19 and FY20.  

Among others, for Ashoka Buildcon, the confidence stems from the fact that it is well placed to benefit from upcoming opportunities in the roads sector, given its well-funded balance sheet. Its healthy order book lends confidence to EPC revenue CAGR (compound annual growth rate) of 19 per cent from FY17 to FY19, says MOSL.

NCC's healthy order book, stable margins, and reasonable leverage is likely to lead to CAGR of 10 per cent on revenues and 25 per cent on reported profits from FY17 to FY19, say analysts at Kotak Securities. 

The strong balance sheet and execution track record of Sadbhav engineering, whose EPC business remains in a sweet spot, provide comfort, say analysts. With a healthy and diversified order book of Rs 8,400 crore for the construction business, MOSL expects annual order flows of Rs 6,000 crore (EPC and HAM projects) for the next two years.

For IRB Infrastructure, mature road projects provide strong comfort on near-term earnings and cash flows while recently-commissioned and under-construction projects provide long-term visibility, feel analysts. MOSL expects revenues to grow at 26 per cent CAGR from FY17 to FY19 and earnings to grow eight per cent CAGR during the period. 

Dilip Buildcon expects a strong Rs 10,000 crore in orders during FY18, mainly driven by the roads segment. Further, the recent sale of its BOT portfolio at 1.05x book value (inflows of Rs 700 crore) would reduce standalone debt significantly and a gradual improvement in working capital would keep return ratios elevated, feels IIFL.

For Simplex Infrastructure, Kotak Securities expects a 17.9 per cent upside as order inflows increase going forward during the financial year due to improvement in macroeconomic climate.

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