Will execution and awarding continue to improve?

Many road-sector focused companies reported better than expected (street estimates) financial performance in 1QFY21, in spite of Covid19-related disruptions. This, along with a healthy under-construction order book, will ensure that FY21 will record marginally lower-to-flat revenues. Importantly, awards have picked up (project pipeline of 10,700km), which will support FY22E-23E revenue growth.

Execution better than expected, in spite of Covid19:

Against the expectation of a steep revenue decline, the impact of Covid19- disruptions was lower on execution for road contractors. This was led by recovery over May/June, despite unavailability of skilled labour as well as logistics constraints related to RM availability. Overall, 1Q revenues dropped 18-43% for DBL, ASBL and HGINFRA, while KNRC reported modest YoY revenue growth of 3%, given higher share of irrigation projects.

Margins have been stable, despite lower revenues: 

In spite of a huge decline in revenues during 1QFY21, Ebitda margins for road contractors have remained largely stable or have seen a marginal decline in the past two quarters. Overall margins were supported by strong control on costs, better margins from projects nearing completion, healthy profitability of HAM and irrigation projects, as well as increase in the average size of projects under execution.

Improving labour availability to drive revenues in 2HFY21:

Large-scale labour migration following the onset of Covid19 has impacted most infra and construction companies. While availability of labour has gradually improved over May-July.  Full-fledged recovery in execution is expected only post the monsoon season.  Some of the companies like HGINFRA expect to have full labour availability by end of September, while ASBL and DBL already have more than 90% of labour availability, with expectation of strong pickup in execution post the monsoons. KNRC expects labour availability across its project sites to improve to 80-85% by October.

Under-construction order book expanding, as AD is received: 

The order book for most contractors remains healthy at 2.4-3.5x book to-bill, thereby lending growth visibility to the next few quarters. Many projects that have been recently awarded are yet to receive appointed dates (ADs; expected over the next two quarters), which should further boost execution in the near term.

After minimal ordering at end-March due to the Covid19-related shutdown, awarding of national highway projects over April-July 2020 has been healthy at 2,702km compared with 947km the previous year. In this, MoRTH has awarded 1,708km, while NHAI and NHIDCL have awarded 767km and 227km, respectively. NHAI intends to award ~4,500km of highway projects in FY21. Overall, NHAI has lined up 10,700km of highway projects to be awarded, where a DPR consultant has been appointed.

Balance sheets comfortable, despite WC increase:

Despite weak execution in the past two quarters due to Covid19, overall balance sheets for road construction firms are relatively comfortable. QoQ debt has increased, largely due to rising receivables led by extended lockdowns, which have delayed work certification as well as approval and disbursement of payments from government authorities. 

Recommendations:

Given revenue growth visibility, comfortable balance sheets, execution track-record, we prefer Ashoka Buildcon, Sadbhav Engineering and HG Infra. Key triggers for each include asset monetisation for Ashoka Buildcon, ramp up in execution and order wins for Sadbhav and steady delivery for HG Infra.

Stock Performance

Source: BSE

The stocks in the infrastructure sector have given healthy returns in the past 6 months. PNC Infratech gave a magnificent return of 98.9% from March 25,2020 to September 03,2020. PNC Infratech is a mid-size EPC contractor, with demonstrated capabilities across sectors including roads & highways, airports, railways and other civil engineering works. Based in Agra, Uttar Pradesh, it traditionally focuses on contracts in northern India. Dilip Buildcon (DBL) is a Bhopal-based road contractor and developer, jumped 71.4% in the past 5 months. Ashoka Buildcon (ABL) rallied 59.1% in the same period. Ashoka Buildcon (ABL) is one of the largest highway developers in the country, with interests in EPC works (roads and power distribution), BOT road projects, and manufacture of ready mix concrete.

Sadbhav Eng jumped 52.7% from March 25,2020 to September 03,2020. Sadbhav Engineering is a leading EPC contractor-cum-developer in India. The company has restricted its focus to three key fast-growing sectors – roads & bridges, irrigation and mining. HG Infra spiked 45.2% in the same period. HG Infra is a leading Indian highway contractor based in Jaipur, Rajasthan. Almost 69% of the order book comprises projects from the government and 31% comprises projects from the private sector (FY20). KNR Constructions (KNRC) rallied the least 26.9%.