On August 15, 2019, Prime Minister Narendra Modi in the first Independence speech of his second term promised some big changes to spur development in the country. Two of the key highlights from the speech was Rs 100 lakh crore investment in infrastructure building and to make India a 5 trillion dollar economy in the next five years.
Despite Modi’s big announcement on the infrastructure front, the key road construction stocks continued to follow downward momentum. Share prices of the key road developers Dilip Buildcon, PNC Infratech, KNR Constructions, Ashoka Buildcon, IRB Infrastructure and Sadbhav Engineering have slid around 44 percent since Union Budget 2019 presented on April 5, 2019.
In fact, deal activity this year has been driven by large investors such as Singapore’s sovereign wealth fund GIC and Canadian pension fund manager CPPIB-backed infrastructure investment trust (InvIT), IndInfravit Trust.
Recently, GIC invested about Rs 4,400 crore in road developer IRB Infrastructure earlier this month for its road platform.
Binod Modi, senior research analyst at Reliance Securities said: "Road construction stocks have witnessed steep fall in the last couple of months despite improving on order backlog and execution. While market sentiments have not been favourable for several sectors, inherent issues pertaining to land acquisition and funding constraints took a toll on overall performance of construction stocks.
"Notably, current order book of many construction companies still looks to be strong and giving healthy business visibility for next couple of years, a likely pick up in new ordering from NHAI [National Highway Authority of India] and other government authorities in H2FY20 will generate interest among investors. Recent correction in quality construction stocks offers favourable risk reward opportunity for investors", added Modi.
Among the reason for r
oad construction stocks witnessing a sharp downfall in share prices include the ongoing economic slowdown and liquidity issues.
Most brokerages, including Motilal Oswal, CLSA and Reliance Securities, have highlighted that there's a delay in getting projects from NHAI, which is currently struggling with land acquisition and a delay in financing PPP (purchasing power parity) projects due to tough debt markets. This has resulted into pushing the execution by six months.
As a consequence of multiple factors, the share prices and earnings of road developers have been continuously declining irrespective of massive order books and foreign investment. The biggest player in the road construction business, Dilip Buildcon’s June quarter order book stood at Rs 29,029 crore.
Ashoka Buildcon’s order backlog was at Rs 8,168 crore while KNR Constructions reported order book of Rs 4,633 crore as on June 30, 2019.
In terms of June quarter earnings, Dilip Buildcon reported dismal set of earnings, where its consolidated revenue from operations declined 3.41 percent year-on-year (YoY) to Rs 2,436 crore while net profit fell 55 percent YoY.
Meanwhile, Ashoka Buildcon’s consolidated revenue from operations increased to Rs 1,168 crore as against Rs 961 crore in the corresponding quarter last year. However, the company reported net loss at Rs 23 crore as against Rs 7 crore last year.On the other hand, KNR Constructions reported a bad June quarter, with consolidated total revenue declining 10 percent YoY and net profit falling 38 percent YoY.