Watch out for road infra companies' order flows

 
Analysts would be watching the pace of order inflows for road construction companies, after a mixed trend in the December quarter.

IRB Infrastructure, Sadbhav Engineering, Ashoka Buildcon, KNR Constructions and PNC Infratech have been favourites within the mid-cap space, mainly due to the brisk pace of orders from the National Highways of India in past quarters. The Street was hopeful that these companies would lead earnings growth among mid-caps in the quarter. The results, here were, as mentioned earlier, mixed.

However, the Street's bullishness on these companies remains unchanged, primarily due to optimism on orders in the March quarter and the sector's longer-term growth prospects. Sadbhav and KNR had insignificant order flows in the December quarter.

PNC, Ashoka Buildcon and Sadbhav expect order flows of Rs 1,500 to Rs 2,400 crore between March and June '16. Also, with the fourth (March) quarter  of any financial year usually seeing higher order inflow, the Street expects road infrastructure companies to post 15-20 per cent revenue growth in January-March. The Union Budget is also expected to announce higher allocation to infrastructure sectors.

In the December quarter, IRB, Ashoka and PNC kept up with expectations, posting revenue growth of 32-38 per cent. Those for KNR and Sadbhav were a let-down. The latter's consolidated revenue grew only four per cent, due to lower mining revenue, though a small revenue contributor at about 15 per cent. That of KNR dipped 4.5 per cent over a year.

The positive takeaway is an upward trend in toll collection for a fifth quarter in succession, noted a recent Emkay Global report. With the momentum expected to stay, analysts remain upbeat on toll operators such as IRB, Sadbhav and Ashoka. What needs to be seen is whether the companies see any meaningful rises in rates in the coming months, as the wholesale price index, a key component in determining these, is declining.

The rate rise in the December quarter was two to three per cent over a year. The year-on-year rise in toll revenue for IRB and Sabhav was nine and 11 per cent, respectively. Ashoka was an exception, with a 22 per cent increase.

With further expansion in the Sambalpur project where operations will commence by March with a 30 per cent rate rise, analysts feel Ashoka might outperform the rest in toll revenue growth in the near term. There is concern on PNC's toll operations, as its key Bareilly-Almora and Ghaziabad-Aligarh projects continue to operate at below than estimated collection levels.

Most road infra companies also earn revenues from road building operations, also termed the engineering, procurement, construction (EPC) business. The quarter gone by saw an increase in revenue from this but it hurt the operating margin of IRB, from 61 per cent in the same quarter of FY15 to 54 per cent. Sadbhav also saw flat margin growth at 10 per cent. The rest increased their margins by 300 to 800 basis points (bps) with a fall in the prices of diesel and bitumen. The margins are expected to remain healthy, led by traffic growth and as the order book and implementation pick up.

While interest cost continues to stay high for the industry, Teena Virmani of Kotak Securities says what is positive is the cooling of interest rates (25-30 bps reduction in short-term borrowing) and what needs to be watched is whether the average cost of borrowing reduces. That said, decent growth in revenue is shielding interest cost escalation. Additional capital expenditure in a competitive pricing scenario might curtail profit growth.

Going by price targets set by analysts polled on Bloomberg, road infra stocks offer a 12-month price upside of 30 to 50 per cent. If the expected order inflow targets are not met within the next two quarters, there is a risk of the price targets seeing downward revision.

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