Increased outlay to infrastructure will further boost interest in roads and construction stocks

Increased outlay to infrastructure will further boost interest in roads and construction stocks

ET Intelligence Group: In the past two quarters, the business in India’s infrastructure sector has shown noticeable improvement. Thanks to the reforms of the government which eased liquidity in the sector, execution of roads projects has considerably improved. Execution of infrastructure projects by well-placed construction companies improved to 70-85% in the December 2020 quarter from 35-40% in the March 2020 quarter. In addition to this, reducing cases of Coronavirus-infected patients, availability of labourers at projects’ locations, and returning of labourers who had migrated to non-urban areas ensured that the momentum in execution of projects is likely to continue. Also roads companies are seeing traffic growth in the range of 10-15% in the past two quarters as restrictions on movement of goods and people eased in key states.

In the context of these facts, the announcements related to investments in the sector in the Union Budget have provided enough reasons for investors to increase their exposure in select stocks in the sector. The Budget has increased capital expenditure towards the sector to Rs5.54 lakh crore for FY22. This is a jump of 34.5% in its allocation when compared to FY21. Also under the National Infrastructure Pipeline (NIP), the government has increased the awarding of infrastructure projects for FY22. The government will award 7400 infrastructure projects for FY22 from 6835 projects in FY21. As regards the Bharatmala Pariyojana Project, the government will be awarding additional 8500 km of national highway projects in the next one year. It must be noted that the government has already awarded 13000 kms length of road projects under the Bharatmala Pariyojana Project.

These announcements have come at a time most construction and roads companies are in better shape than a year ago. According to various estimates of analysts, the order book to bill ratio of well-placed construction companies is over 3. This means that the size of the order book of these companies provides visibility of revenues for at least three years. Also on the roads and highways projects, traffic growth estimates of analysts have changed. They estimate that traffic growth on key roads projects is likely to be in the range of 9-12% for the next few quarters.

Given these facts, select and well-placed companies which have superior execution capabilities, light balance sheets and relatively higher number of financial closure of their projects are likely to see increased interest from the street. Companies which are likely to see increased interest from the street are

, PNC Infratech, Dilip Buildcon and . According to Bloomberg’s estimates, these aforementioned companies are likely to show growth of 35-55% in their Earnings per Share (EPS) in FY22 in comparison with FY21, indicating high visibility of revenues growth in the coming quarters.

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