Infrastructure companies that cover laying of roads and work on irrigation and mining projects have suffered badly over the past few months. With the economy gradually opening up, brokerages are back to being bullish on the sector given the massive order book and series of investments expected this fiscal. Moreover, Aatma Nirbhar Bharat Abhiyaan, NHAI and NIP programmes will build a long-term view on the sector with scope of re-rating, brokerages said.
Continuous project awards by NHAI and expected government projects in Q3FY21 are making this space bullish. Brokerages suggest that there's a scope of re-rating in infrastructure companies as banks are also being supportive by using surplus liquidity and low interest rates to increase allocation, for infra companies.
Order book tailwinds
According to HDFC Securities, road-related capex annually has been Rs 2 trillion, and NIP (National Infrastructure Pipeline) envisages Rs 20 trillion of capex in roads over the next five years.
"The NIP program may allay concerns on Bharatmala Phase 1 (BM-1) awards nearing completion and redrawing on BM-2 under NIP. This augurs well for more long-term ordering and sustainable sectoral growth," the brokerage added.
Meanwhile, National Highways Authority of India (NHAI) has provided a significant boost, awarding its highest ever order awards (744km, +10 percent YoY) in April-August 2020.
Simultaneously, other government bodies have started awarding incremental orders in roads, irrigation and mining. We expect the government order award activity to pick up further from Q3FY21, said Phillip Capital.
Listed players to benefit the most
The infra space has learnt that diversification will bring growth in the next two years, as a result, most companies have now started taking up non road projects. "Dilip Buildcon has already reduced roads exposure to 49.7 percent whilst KNR and Ashoka are at 60.3 percent and 80.3 percent respectively. PNC has bagged a small water project worth Rs 2.9 billion," said HDFC Securities report.
It further added that high entry barriers, robust government capex pipeline on education and health sector, have more growth. That's why larger roads players are focusing on diversification more on the non-building segment.
Top Infra picks
According to Phillip Capital, the fundamentals of most companies are strong in terms of balance sheet, order book, executive activity and award momentum. Also, stocks are trading at abysmally inexpensive valuations and would deliver significant returns over 12-18 months.
Top picks are NCC, Ahluwalia Contracts, KNR Construction and Ashoka Buildcon, added the brokerage.Meanwhile,HDFC Securities remains optimistic and sees the sector
rerating at a 4-5x book-to-bill and less than 6/4.6x P/E for FY22/23E when the peak ordering is still some time away.Top picks for the brokerage are KNR Constructions, PNC Infratech, Ahluwalia Contracts, Capacite Infrastructure and KPTI.