Monday, December 23, 2024

Defence stocks have done it, will the infrastructure sector follow suit? 6 stocks of the highway makers

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Government policy influences every sector to some extent, but in certain sectors, it is the primary driver of growth and survival. This is particularly true when all the spending in a sector comes from government budgets, whether central or state. Initially, the central government led these efforts, but recognizing the political capital in infrastructure development, state governments have increasingly focused on road and highway construction. Coordinated efforts between state and central governments have significantly reduced the lead time for road construction projects, positively impacting companies’ bottom lines. This reduction in lead time leads to lower working capital requirements and higher turnover, as companies can securitize their assets to other players or private equity funds and take on new projects, fostering growth.

Now this growth in bottomline has been rewarded by the street and that is the reason why it becomes important for the street to see that construction and awarding of contracts continues to be with the same speed as was happening in the last ten years.

This sector first gained prominence about 25 years ago when Prime Minister Atal Bihari Vajpayee initiated road projects to connect the north, south, east, and west of India. Despite early progress, road construction faced numerous challenges, including land acquisition and banking issues.

However, about 10 years ago, the current government prioritized road construction, leading to significant improvements. This sector’s dependence on government focus and spending makes it highly responsive to government priorities. When road infrastructure is prioritized, resource allocation and policy support ensure rapid progress. While some companies specialize in road construction, others diversify into various infrastructure projects to mitigate risks and leverage their expertise in managing thin margins. That is where the interest rate becomes an important factor for these companies. In India’s economy, where the cost of capital is crucial, many sectors benefit from lower interest rates, but the strongest correlation is with road construction and infrastructure.

Government demand for large infrastructure projects, such as roads and airports, increases with lower interest rates, providing more headroom for spending. This leads to higher demand for construction and contracting companies. Additionally, lower interest rates improve these companies’ operating metrics. Now with the global interest rates curve turning southward, will these help these companies needs to be seen. However, this sector also faces challenges. Its reliance on government focus poses a risk, although a shift in government priorities is unlikely. Litigation risks remain, as any legal dispute can halt projects, sharply increasing working capital and other costs. Moreover, revenue recognition in this sector can result in fluctuating quarterly performance, with some periods showing slower growth as projects progress.Look at the sales chart below for trends. Look that way turnover has grown from FY 18 to FY 23. Clearly there is a growth which is much better than what it was previously. Infrastructure was the only sector which saw multiple tailwinds even during the covid. In order to pump money into the economy at a time when private expenditure was down. So when an infrastructure project is announced, money flows right into cement, steel and also into hands of the bottom of the pyramid who participate in the construction activity and that works well for the economy.

In infrastructure companies the other most important thing to look for is the debt levels. Remember the problem with the infrastructure companies came in the period between 2008 and 2014, because of high debt only. Now whether the growth is being accompanied by higher growth in debt is something which needs to be looked at.It yes, then it is a cause of concern and if not, then it is a positive.

Next thing to look at is whether the companies have debt which is manageable and has the debt equity situation turning better, The answer is Yes.


Second question, whether the order book will continue to move upward or not. The answer is yes, not only because government expenditure is likely to remain high. But even in the last few years, even the expenditure done by state governments has increased and the fact is that it is now becoming politically correct to spend on infrastructure.

Coming to the stock price upside potential, three of the stocks are showing negative upside potential. This happens in two conditions, first the stock price has seen a sharp rise which was higher than estimates of analyst project, so current prices are higher and the upside potential comes as negative. These tend to change with analysts’ estimates getting revised and in the infrastructure sector as the government settles and new awards are announced, there is a possibility of earning and price estimates getting revised.

The list comprises companies with a target upside potential of up to 31 percent from the Infra space. The stocks collated with data from the latest Stock Reports Plus report dated June 15th, 2024. The list also contains a count of analysts evaluating each stock.

About Companies

IRB Infrastructure Developers Limited is an infrastructure development company. The Company is engaged in constructing roadways and highways. The Company is involved in engineering, procurement and construction (EPC), and operation and maintenance across all its businesses. The Company operates through two segments: Operate and Transfer (BOT)/ Toll Operate and Transfer (TOT) and Construction. The BOT/ TOT segment is engaged in the operation and maintenance of roadways. The Construction segment is engaged in the development of roads. The Company manages and operates approximately 12,975 lane kilometers (km) across 23 assets. Its 23 projects are held under three entities, its 100% owned seven projects, which includes 1 TOT, 3 BOT and 3 HAM projects; private infrastructure investment trust owns nine BOT projects, of which the Company owns 51% stake; and public infrastructure investment trust owns seven BOT projects, of which the Company owns 16% stake.

Ashoka Buildcon Limited is an infrastructure development company. The Company is engaged in construction and maintenance of roads and supporting services to land support-operation of toll roads and others. The Company is also engaged in the construction of buildings (EPC), power, railways and city gas distribution. The Company’s segments include Construction & Contract, Built, Operate and Transfer (BOT)/ Annuity Projects and Sale of Goods. The Construction & Contract segment comprises engineering and construction of building, transportation infrastructure, heavy civil infrastructure and power transmission & distribution projects. Built, Operate and Transfer (BOT) includes Annuity to develop infra developer under BOT & Annuity. Sale of Goods segment consists mainly the sale of construction material which includes ready mix concrete (RMC) and real estate.

KNR Constructions Limited is an infrastructure company. The Company provides engineering, procurement and construction (EPC) services. The Company is engaged in the business of infrastructure sector, primarily in the construction of roads, bridges, flyovers and irrigation projects. The Company’s projects include Highway Projects, Irrigation and Water Management, River Bridges, and Urban Water Development. Its subsidiaries include KNR Agrotech & Beverages Pvt. Ltd., KNR Infrastructure Projects Pvt. Ltd., KNR Energy Ltd., KNRC Holdings and Investments Pvt. Ltd., KNR Muzaffarpur-Barauni Tollway Pvt Ltd., KNR Tirumala Infra Pvt. Ltd., KNR Srirangam Infra Pvt. Ltd., KNR Shankarampet Projects Pvt. Ltd., KNR Somwarapet Infra Projects Pvt. Ltd., KNR Palani Infra Pvt. Ltd., KNR Muzaffarpur Holdings Pvt. Ltd., Mesmeric Software Solutions Pvt. Ltd., Nag Talent Ventures & Infotech Pvt. Ltd., Gradient Estates Pvt. Ltd. and Asara Construction & Projects Pvt. Ltd.

J. Kumar Infraprojects Limited is a company, which is engaged in the business of execution of contracts of various infrastructure projects including transportation engineering, irrigation projects, civil construction and piling work. The Company’s segments include Metro and railways, Flyover and bridges, and Civil and others. The Company’s Civil and others segment is engaged in the construction of commercial buildings, hospitals and medical colleges, railway terminus and stations, sports complexes and swimming pools, among others. The Company’s projects include Delhi Elevated Metro, Amar Mahal Flyover, BKC – Chunabhatti Flyover, Ahmedabad Metro, Delhi Underground Metro, Sky Walk – Mumbai Project, ESIC Medical College, Alwar and KSB Underpass, Pune. The Company owns a fleet of construction equipment and machinery including approximately seven tunnel boring machine (TBM), 44 hydraulic piling rigs and two straddle carriers.

H.G. Infra Engineering Limited is a company engaged in construction, development, designing, and management of infrastructure projects. The Company is engaged in engineering, procurement and construction (EPC), maintenance of roads, bridges, flyovers and other infrastructure contract works. It is focused on hybrid annuity model (HAM) projects. Its civil construction projects include extension and grading of runways, railways, and land development, as well as water pipeline projects. Its clients include government and private sectors. Its civil construction projects include extension and grading of runways, railways, and land development, as well as water pipeline projects. It has presence in Haryana, Delhi, Rajasthan, Uttar Pradesh, Telangana, Odisha, Andhra Pradesh, Karnataka and Maharashtra. Its projects include Rewari Ateli Mandi, Gurgaon Sohna, Narnaul Bypass, Banar-Bhopalgarh (Rajasthan), Morshi-Chandur Bazar-Achalpur (Maharashtra) and Jodhpur-Marwar (Rajasthan).

Welspun Enterprises Ltd is a holding company. The Company operates in the road and water infrastructure industry with investment in the oil and gas space. The Company operates through two segments: Infrastructure, and Oil and gas. It has Hybrid Annuity Model (HAM)-Projects and Build-Operate-Transfer (BOT)-Toll Projects. Its HAM Projects include Delhi Meerut Expressway – Package I (NH-24), Four-laning of Chutmulpur – Ganeshpur (NH-72A) & Roorkee – Gagalheri (NH-73), Four-laning of Gagalheri – Saharanpur – Yamunanagar (NH-73A), Six-Laning of Aunta – Simaria (NH-31) including Major Bridge over Ganga river, Four-laning of Chikhali – Tarsod (NH-6), Four-laning of Sattanathapuram – Nagapattinam (NH-45A) and Dewas Industrial Water Supply Project. Its BOT-Toll Projects include Four-laning of Dewas – Bhopal (SH-18), Two-laning of Raisen – Rahatgarh (SH-19), Development of Hoshangabad – Harda – Khandwa road (SH-15) and Augmentation of Water Supply Scheme of SAS Nagar -Mohali.

Source for About Companies: SR Plus

Stock Reports Plus, powered by Refinitiv, is a comprehensive research report that undertakes an in-depth quantitative analysis to generate standardized scores for each of the five key components. A simple average of these scores is then normally distributed to reach an average score. Each stock is ranked on a scale of 1 to 10. A score of 8 to 10 is considered positive, 4 to 7 is neutral and 1 to 3 is given a negative outlook.

In addition to these scores, the report also contains trend analysis, peer analysis and mean analysts’ recommendations to help an investor make better & informed investment decisions.

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