Mr. Parikshit Kandpal, Institutional Research Analyst, HDFC Securities
Despite concerns around COVID-19, for the Infrastructure sector, this period has been mostly Reboot-2.0. (1) NHAI awarding (FYTD21) started with a bang (about to surpass FY20); (2) the largest client NHAI eased working capital for developers; (3) banks are using surplus liquidity and low interest rates to increase allocation to the sector; (4) concerns on NHAI balance sheet seem to be abating; (5) increase in fuel cess to add Rs 1tn to fund infra annually (total Rs 2.3tn); (6) asset monetisation to lead to BS deleveraging; and (7) Atmanirbhar and NIP programs' on-ground execution lends visibility to longer duration Indian Infra buildout. We remain optimistic and see sector rerating at a 4-5x book-to-bill and sub 6/4.6x P/E for FY22/23E when peak ordering is still some time away.
Multiple tailwinds to drive order book: The NHAI ordering in the last term of NDA government touched ~Rs 3.6tn (Rs 600bn/annum, FY14-19). Overall, road-related Capex annually has been Rs 2tn, and NIP envisages Rs 20tn of Capex in roads over the next five years (Rs 4tn annually). We believe this is a big ask though trend points to large Capex outlays. The NIP program may allay concerns on Bharatmala Phase 1 (BM-1) awards nearing completion and redrawing on BM-2 under NIP. This augurs well for more long-term ordering and sustainable sectoral growth.
Balance sheet improvement likely, FY23 to be the year of asset monetisation: We expect about 100+ HAM projects to achieve COD over the next two years. This has the potential to unlock about ~Rs 120bn of equity investments into the HAM projects by private developers. Even if we assume about 1.2x P/BV, the total investment is expected to be Rs 140bn ($2bn). With IRRs over 10%, the HAM INVIT may pose attractive risk-reward vs traditional savings instruments like FDs, AAA-rated bonds, Gsecs, etc. The monetisation may lead to further BS/CF improvement for our coverage universe.
Players diversifying order book given the risk of roads ordering saturation: Despite robust order pipeline and NIP program, developers understand the need to be diversification-ready over the next two years. DBL has already reduced roads exposure to 49.7% whilst KNR and Ashoka are at 60.3% and 80.3% respectively. PNC has bagged a small water project worth Rs 2.9bn and is looking to add more non roads projects over the next few quarters in water and railways/metro. Buildings segment players may not diversify, but given high entry barriers, robust government Capex pipeline on education and health sector, growth saturation is some time away. Even larger roads players are focusing on diversification more on the non-building segment.
The case for multiple rerating; 4 years infra awards runway ahead: FY21E awarding was supposed to be muted, post the COVID-19 pandemic, but we were positively surprised by robust awards. Horizontal developments like roads run across rural/urban areas and have considerable employment potential in rural areas. Besides, infrastructure creation is the backbone of manufacturing and translates to lower logistics costs. The plan resonates with the GOI Atmanirbhar schemes. The HAM assets, too, are backed by revenue models and decent IRRs. At sub 4.6x FY23E core P/E and peak awards some time away, we believe the sector has 1SD target P/E expansion potential of 2-3x PE from here. We have introduced FY23E financials for coverage companies and incorporated the P/E expansion changes in the detailed tables in the thematic section.
TOP PICKS: KNR, PNC Infra, Ashoka, Ahluwalia, Capacite Infra and KPTL.