Interest in infrastructure stocks has picked up on better availability of labour, improved project execution and the budget’s higher fund allocation for the sector. In fact, in the past six months, the ET Construction Index has gained 49% compared to the Nifty 50 index’s 31% gain.
Analysts, however, are of the view that headroom for further upside exists only for select shares, such as PNC Infratech, KNR Constructions and Dilip Buildcon.
They cite a few reasons.
One, the order pipeline for the next two months —March and April— is quite high and will enable these companies to tap incremental order flows. Historical data points to the fact that incremental order inflow is a key trigger of investor interest in construction as it increases visibility of revenue in the subsequent quarters.
Currently, construction companies have an order book to sales ratio of nearly 3.5, which means they have potential revenue visibility for the next three years.
Besides, the National Highways Authority of India (NHAI) has set a higher target of awarding projects in the current quarter ending March 31.
Till December of the ongoing fiscal year, NHAI awarded 2,423 kilometre-length of national highway projects. Analysts say NHAI will award 4,800-5,200 km length of road projects overall in the current financial year, higher than its original target of 4,500 km.
This means that in the January-March quarter, NHAI is likely to award roads projects equalling to or more than what it did in the entire first nine months, providing better opportunities to these construction companies to bag incremental orders.
Second, unlike a large number of road and construction companies that have stretched balance sheets, these three construction companies are either debt-free or have negligible debt (debt to equity of less than 1) due to their asset-light business model.
These companies have also secured financial closure for road projects, meaning they can easily grab incremental orders.
They have demonstrated encouraging financial performance in the December quarter, with revenue growth either higher than or meeting Street estimates. Increased availability of workers at construction sites and the return of migrant labourers to urban areas should further improve project execution in the coming quarters.
Last, analysts say PNC Infratech, KNC Constructions and Dilip Buildcon are trading at attractive price-to-earnings multiples, ranging from 9.5 to 15 times if one considers financial year 2023 earnings and 10-18 times compared to fiscal year 2022 earnings.
This is attractive compared to the sector’s peak PE multiple of 20 times over the past five-year period.
Given these factors, analysts say the stocks of these companies may be re-rated by the Street.