Bank credit stress and a slowdown in ordering have had an impact on most infra companies, but Nomura expects companies with robust operating cash flow generation (OCF) and low leverage to emerge as winners and gain market share as competition starts to decline.
Indian road infrastructure sector offers a lot of opportunity, as the central government alone has pipelined Rs 8.5 trillion in it, brokerage Nomura said in a report. With a strong execution track record, lowest leverage and a strong orderbook, PNC Infratech is Nomura’s preferred pick in the sector. The brokerage has also KNR Construction and Dilip Buildcon in its favourite list.
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It maintained ‘Buy’ rating on PNC Infratech and raised the target price (TP) to Rs 278 from earlier Rs 267 .
The brokerage also increased its financial year (FY) 2020/21 EPS (earnings per share) estimates by 23 percent/13 percent to account for the new orders it won and higher-than-expected execution.
The H1FY20 execution highlights that the company management's guidance is conservative, but further cash flows from asset sales add comfort to an already low-debt balance sheet, the brokerage said.
Nomura said that the key downside risks would be a rise in working capital and reduced availability of bank finance. “Public infrastructure spending and a boost from reforms should lead to a revival in the road sector. PNC Infratech, with its strong in-house execution capabilities, and one of the strongest balance sheets in the sector, is well placed to benefit from emerging opportunities, in our view,” it said.
The other stock picked up by Nomura is KNR Construction. The brokerage maintained ‘Buy’ call on the stock and raised its target price to Rs 375 from earlier Rs 363 .
“KNR has the best OCF (operating cash flow) generation track record in the sector. With increased visibility on near-term execution and reasonably low valuations, we maintain our Buy rating,” Nomura said.
KNR reported a pickup in execution in Q2FY20 after a weak Q1. "Further, with appointed dates in place for all its Hybrid-Annuity Model (HAM) projects and new short cycle and higher EBITDA (earnings before interest, tax, depreciation and amortisation) margin irrigation projects in the current order book, we see increased visibility on KNR’s revenues."
Nomura has cut EPSfor FY20F/21F by 2 percent to 4 percent on the termination of one HAM project. Key risks are worsening working capital and slower execution, the brokerage said.
The third stock is Dilip Buildcon.
The brokerage upgraded the stock to ‘Buy’ from ‘Neutral’ earlier and also increased the target price to Rs 505 from earlier Rs 483.
With appointed dates and an asset sale deal largely in place, Nomura draws comfort on execution and deleveraging from 2HFY20. An increase in cash generation is the key driver for the upgrade.
Dilip Buildcon share has largely been flat to down over the past 12 months. The stock is down almost 70 percent from its peak; meanwhile, the Nifty 50 rose 14 percent in the same period, Nomura noted.
Investors were concerned about the company’s ability to arrange non-fund-based bank credit lines and get appointed dates which led to the fall.
However, Nomura expects strong cash generation in H2FY20F, and the asset sale deal with Cube for certain HAM projects to keep debt levels in check in FY21-22.
First Published: Dec 13, 2019 1:59 PM IST