Article

Is Road Contractors Segment Seeing a Recovery?

23 Nov 2020 Nikita Bhoota

All major road contractors have reported healthy recovery in execution during 2QFY21 on account of labour and RM availability improved. Margins have largely remained flat, in spite of Covid19-related headwinds. The order book for road contractors is healthy at 2.5-6.3x book-to-bill which, coupled with the receding monsoon, improved labour and supply chains, should support healthy execution in 2HFY21. Healthy pipeline to be awarded by the NHAI in the remaining year should aid medium-term growth visibility.

Strong execution in 2Q:

Revenues for road contractors sharply recovered in 2Q, due to easing of Covid19 restrictions across regions. Labour-force availability as well as logistics constraints relating to raw materials improved QoQ and led to healthy execution during the quarter.

Margins have been stable:

Despite the significant disruption due to Covid19, Ebitda margins for road contractors have largely remained stable in the past two quarters. Higher share of irrigation contracts, projects nearing completion and pick-up in execution have supported margins during 2Q. We expect margins to be stable in 2HFY21, supported by improving execution at the high-margin, captive HAM projects.

Labour availability back to pre-Covid levels:

 Following the Covid19 lockdown in April-May, execution of road and infra projects were impacted by the unavailability of adequate workforce, given the migration back to their home towns. The situation started improving in June-July and has returned to normalcy for most road contractors.

Order book remains healthy for all road contractors:

Order book for most contractors remains healthy, at book-to-bill of 2.5-6.3x, thereby lending healthy growth visibility over the next few quarters. Many contractors including DBL, KNRC, ASBL and SADE have won projects recently as well. Furthermore, many HAM/EPC projects are yet to secure appointed dates (PNCL has Rs90bn worth of projects, where AD is pending).

Pickup in order awarding likely in 2HFY21:

NHAI has awarded 40 projects of 1,330km, worth Rs472.9bn, in 1HFY21. Overall, MoRTH has awarded projects of 5,052km in 1HFY21. NHAI targets awarding 4,500km of highway projects in FY21. We expect healthy awarding in coming months which should further improve order book for road contractors.

Recommendations:

KNR Constructions Ltd (KNRC), PNC Infratech Ltd (PNCL) and Ashoka Buildcon Ltd (ASBL) remain our preferred picks, given their strong delivery track-record, healthy balance sheets and attractive valuations

Stock Performance:

Nifty 50 have rallied 54.6% (March 25, 2020- November 20,2020) since the first nationwide lockdown was announced by Prime Minister Narendra Modi However, some road contractor companies’ stocks that have outer performed or have given more or less similar returns to benchmark index Nifty 50 in the same period.

Company Name

25-Mar-20

20-Nov-20

Gain/Loss

Ashoka Buildcon (ASBL)

44.3

74.05

67.2%

Dilip Buildcon (DBL)

216.7

362.9

67.5%

Sadbhav Eng

32.7

50.75

55.2%

PNC Infratech

84.4

167.45

98.4%

HG Infra

137.7

200.2

45.4%

KNRC

194.2

292.8

50.8%

Source: BSE

The stocks in the infrastructure sector have given healthy returns in the past 8 months. PNC Infratech gave a magnificent return of 98.4% from March 25,2020 to November 20,2020. 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 focusses on contracts in northern India. Dilip Buildcon (DBL) is a Bhopal-based road contractor and developer, jumped 67.5% in the past 8 months. Ashoka Buildcon (ASBL) rallied 67.2% 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 55.2% from March 25,2020 to November 20,2020. 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 45.4% 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 50.8% from March 25, 2020 to November 20,2020.


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Is Road Contractors Segment Seeing a Recovery?

23 Nov 2020 Nikita Bhoota

All major road contractors have reported healthy recovery in execution during 2QFY21 on account of labour and RM availability improved. Margins have largely remained flat, in spite of Covid19-related headwinds. The order book for road contractors is healthy at 2.5-6.3x book-to-bill which, coupled with the receding monsoon, improved labour and supply chains, should support healthy execution in 2HFY21. Healthy pipeline to be awarded by the NHAI in the remaining year should aid medium-term growth visibility.

Strong execution in 2Q:

Revenues for road contractors sharply recovered in 2Q, due to easing of Covid19 restrictions across regions. Labour-force availability as well as logistics constraints relating to raw materials improved QoQ and led to healthy execution during the quarter.

Margins have been stable:

Despite the significant disruption due to Covid19, Ebitda margins for road contractors have largely remained stable in the past two quarters. Higher share of irrigation contracts, projects nearing completion and pick-up in execution have supported margins during 2Q. We expect margins to be stable in 2HFY21, supported by improving execution at the high-margin, captive HAM projects.

Labour availability back to pre-Covid levels:

 Following the Covid19 lockdown in April-May, execution of road and infra projects were impacted by the unavailability of adequate workforce, given the migration back to their home towns. The situation started improving in June-July and has returned to normalcy for most road contractors.

Order book remains healthy for all road contractors:

Order book for most contractors remains healthy, at book-to-bill of 2.5-6.3x, thereby lending healthy growth visibility over the next few quarters. Many contractors including DBL, KNRC, ASBL and SADE have won projects recently as well. Furthermore, many HAM/EPC projects are yet to secure appointed dates (PNCL has Rs90bn worth of projects, where AD is pending).

Pickup in order awarding likely in 2HFY21:

NHAI has awarded 40 projects of 1,330km, worth Rs472.9bn, in 1HFY21. Overall, MoRTH has awarded projects of 5,052km in 1HFY21. NHAI targets awarding 4,500km of highway projects in FY21. We expect healthy awarding in coming months which should further improve order book for road contractors.

Recommendations:

KNR Constructions Ltd (KNRC), PNC Infratech Ltd (PNCL) and Ashoka Buildcon Ltd (ASBL) remain our preferred picks, given their strong delivery track-record, healthy balance sheets and attractive valuations

Stock Performance:

Nifty 50 have rallied 54.6% (March 25, 2020- November 20,2020) since the first nationwide lockdown was announced by Prime Minister Narendra Modi However, some road contractor companies’ stocks that have outer performed or have given more or less similar returns to benchmark index Nifty 50 in the same period.

Company Name

25-Mar-20

20-Nov-20

Gain/Loss

Ashoka Buildcon (ASBL)

44.3

74.05

67.2%

Dilip Buildcon (DBL)

216.7

362.9

67.5%

Sadbhav Eng

32.7

50.75

55.2%

PNC Infratech

84.4

167.45

98.4%

HG Infra

137.7

200.2

45.4%

KNRC

194.2

292.8

50.8%

Source: BSE

The stocks in the infrastructure sector have given healthy returns in the past 8 months. PNC Infratech gave a magnificent return of 98.4% from March 25,2020 to November 20,2020. 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 focusses on contracts in northern India. Dilip Buildcon (DBL) is a Bhopal-based road contractor and developer, jumped 67.5% in the past 8 months. Ashoka Buildcon (ASBL) rallied 67.2% 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 55.2% from March 25,2020 to November 20,2020. 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 45.4% 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 50.8% from March 25, 2020 to November 20,2020.