Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities
HDFC Securities Institutional Equities (HSIE) hosted the 4th Annual Infrastructure - Investors Forum on 18/19th Feb 2021, though virtual this time. We had attendees from 12 large listed Industrials/Infrastructure companies represented by Promoters, CEO/CFO/IR teams. After almost a decade, there is 'strong/consensus optimism' building up for the Indian Infrastructure story. Ordering has moved beyond roads with focus now on health, education, portable water, renewable energy, manufacturing expansion, uptick in real estate cycle and all this is coinciding with relatively lower crude prices, lowest interest rate and improving GDP/Tax collection. Companies remain bullish whilst valuation is still at 40-50% discount to cross cycle mean. We maintain constructive as envisaged in our thematic 'On Road to Rerating' and 'Triggering a New Cycle'.
All-round bullish commentary, cyclical uptick present unique opportunity: Bid pipeline is the key barometer of cyclical sector growth longevity and, unexpectedly, Union Budget 2021 has given the sector a longer rope and set the tone for higher awarding over the next few years. With over two years left for the next general elections, emphasis will be on awards. Whilst roads have been the key order book driver for most EPC companies, new segments, viz., buildings, water infra, mega projects like HSR, railways, metro, solar, manufacturing etc. are now set to take a big leap. This presents a unique opportunity for diversified plays to gain market share.
Structural changes in supply chain to aid formalisation, BS health: Most of the attendees highlighted that COVID-19 pandemic has adversely impacted 1HFY21, 3QFY21 marked a gradual return to normalcy. Further, 4QFY21 will set the base to pre-COVID levels of operation and growth recovery will pan out from FY22E. The first order impact of COVID-19 has led to shrinkage of creditors days and further consolidation of supply chain. The key takeaways from the conference are: (1) the clients will have to adjust to new equilibrium as EPC players will not take further load on BS; (2) working capital is expected to improve as even the government understand that it's difficult to get work done, given the supply chain issues and many projects have interest-free advance to aid site mobilisation.
Asset monetization, equity recycling to aid deleveraging: Within our coverage universe, we are seeing increased interest from road investment platforms to tie up with reputed developers at under-construction stage for the HAM assets. Relaxation in complete exit by developer at COD+6months will further accelerate cash inflows. We see FY22/23E as an asset monetisation year for most developers with HAM/BOT exposure. This shall lead to rerating of the asset heavy corporates.
Valuation has rerated, full potential still some time away: At HSIE, we have been highlighting a case for valuation rerating building up (please refer our thematic 'On Road to Rerating' and 'Triggering a New Cycle'). Whilst there has been serious rerating for most of our coverage universe, the valuation is still at meaningful discount to long-term median averages (core P/E ~7x FY23E vs 12-15x 1-yr forward). We believe this cycle is backed by (1) government infra program, (2) states captive projects awards, (3) low interest and crude prices, (4) asset equity recycling and (5) strong balance sheet. We remain constructive over the next few quarters. TOP PICKS: LT, KNR, PNC Infra, Ashoka, NCC, Capacite Infra, ITD and KPTL.