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PNC Infra, Sadbhav: 5 road construction stocks IDBI Capital is betting on

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Despite the near-term headwinds such as the upcoming general elections that can slow the contract awarding activity, analysts at IDBI Capital remain bullish on the road ahead for the road construction sector.

The fact that construction companies are fully dependent on government for orders makes it an important event for companies in the road construction segment from order book / revenue perspective.

"Going forward, we expect the volatility in awarding activity to reduce and execution to pick up which will benefit most private players. As a result of earnings volatility, we believe that investing in construction companies is more like a steeplechase than a smooth run. Nevertheless, we expect this volatility to reduce and earnings to grow meaningfully over the next three years," said Mangesh Bhadang, an analyst tracking the sector at IDBI Capital in a recent report.

Among the lot, Ashoka Buildcon, Dilip Buildcon, KNR Construction, PNC Infratech and Sadbhav Engineering are the stocks in this segment Bhadang is bullish on. 

"Dilip Buildcon and Ashoka Buildcon are our top picks followed by PNC Infratech and Sadbhav Engineering. We have a Hold rating on KNR construction. We expect these companies to report 19% revenue CAGR over the next three years which coupled with asset monetisation can significantly improve the stock performance," Bhadang says.

Surprisingly, all these stocks have yielded a negative return over the past one year at the bourses. Sadbhav Engineering has been the worst hit, falling nearly 58 per cent in the last one year, as compared to a rise of around 5 per cent in the S&P BSE Sensex. The S&P BSE Mid-cap and the S&P BSE Small-cap indices, too, lost 16 per cent and 26 per cent during this period, ACE Equity data show.

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From a long-term perspective, Bhadang feels investment in infrastructure is likely to continue at a faster pace given the infrastructure deficit in the country irrespective of who forms the government at the Centre. "On the other hand, lack of majority for one single party in the ensuing election and formation of coalition government may result in crowding out of investments and could be negative for the sector," he says.

Besides IDBI Capital, analysts at Anand Rathi have also maintained a 'buy' rating on PNC Infratech and Sadbhav Engineering.

Here's why IDBI Capital is bullish on these counters:

Ashoka Buildcon – BUY – target price Rs 175: Ashoka Buildcon Ltd is well poised to deliver strong revenue growth of 31.3% over the next three years against meager growth of 7.5% reported over the past three years. Current order book of Rs 9540 crore as of Q3FY19, offers greater revenue visibility with book to bill ratio of 3.0x on trailing twelve month basis.

Dilip Buildcon – BUY - target price Rs 692: Post the recent correction, the stock is available at extremely attractive valuations of 5x FY21 EPS and in our opinion factoring in an extremely pessimistic scenario. Over the past three years, Dilip Buildcon has reported revenue/PAT CAGR of 43% and 61% and it also boasts of extremely superior ROE and ROCE of 28% and 31% for FY18.

KNR Constructions – HOLD – target price Rs 218: KNR has one of the best operating and liquidity parameters in the road construction space. Over the past five years, KNR’s revenue and PAT has grown at CAGR of 41% and 73.5% respectively. However, earnings growth going forward is missing as we expect PAT CAGR of -8.3% for KNR over FY18-21 on the back of high base of FY18 in terms of margins and increasing tax incidence going forward.

PNC Infratech – BUY – target price Rs 183: Higher revenue growth, good balance sheet, large order book and healthy credit rating augur well for PNC. It has delivered stellar growth over the last three quarters and is expected to continue with the same rate in the medium term given its order book.

Sadbhav Engineering – BUY – target price Rs 220: The stock is attractively valued after adjusting for the SIPL stake. What works for Sadbhav Engineering is the long track record of the promoters in the construction industry, capability in timely execution of large-sized road projects and healthy and diversified order book. Despite weak balance sheet and slower growth, we expect the stock to do well. Key concern is higher promoter pledge.

  Date Price (Rs) Date Close (Rs) Change (%)
S&P Bse Sensex 19-Feb-2019 35352.61 20-Feb-2018 33703.59 4.9
PNC Infratech Ltd. 19-Feb-2019 143.05 20-Feb-2018 168.10 -14.9
S&P Bse Midcap 19-Feb-2019 13866.46 20-Feb-2018 16419.51 -15.5
S&P Bse Smallcap 19-Feb-2019 13161.74 20-Feb-2018 17831.04 -26.2
Ashoka Buildcon Ltd. 19-Feb-2019 108.85 20-Feb-2018 148.63 -26.8
KNR Construction Ltd. 19-Feb-2019 202.80 20-Feb-2018 307.80 -34.1
Dilip Buildcon Ltd. 19-Feb-2019 460.35 20-Feb-2018 917.45 -49.8
Sadbhav Engineering Ltd. 19-Feb-2019 166.20 20-Feb-2018 394.30 -57.8
Source: ACE Equity

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