Infrastructure - Results Preview - Strong Sequential Pick-up Seen; Workforce Availability Matters for Growth Hereon - Reliance Securities

Having seen the worst performance in 1QFY21 led by nationwide lockdown, the infrastructure companies are expected to witness sharp sequential recovery in 2QFY21 despite monsoon effects on the back of resumption of works at most project sites following improved labour availability. Workforce availability, which used to be up to 20-30% in cities/metros and ~50-60% level in outskirt projects, significantly improved to the extent of 80-90% during the quarter. Our interactions with various sources suggest that barring few projects due to localized lockdown in the COVID-afflicted red zones, most projects witnessed sharp up-tick in construction activities with steady rise in the arrival of labourers to the project sites. The companies are confident that workforce availability should return to pre-COVID level in the current quarter and hence, execution of projects is also expected to accelerate, going forward.

Additionally, extension of timeline for projects completion and concession period along with partial release of Bank Guarantees (BGs) and retention money offered comfort to the infrastructure companies. Therefore, we believe their working capital is unlikely to have deteriorated further during the quarter. However, the companies which are having projects funded by the state governments especially in states like Bihar and West Bengal are likely to witness certain delay in payments.

Average revenue and PAT of the companies under our coverage universe is expected to decline by ~8% YoY (up 50% QoQ) and ~35% YoY (up 420% QoQ), respectively. Further, their margins are likely to contract on YoY basis led by higher fixed cost. Within our coverage universe, all companies are likely to report YoY decline in adjusted net profit barring KNR Constructions and Ahluwalia Contracts. The companies with steady working capital cycle and higher availability of labourers are likely to be preferred results picks.

Order Book Remains Steady; Pace of Execution Matters

While ordering activities remained soft in FY20 and 1HFY21 both from the government and private clients, the companies under our coverage universe continued to maintain order book to sales ratio of 2.5-4x, which provides a decent visibility for the next 2-3 years. Thus, the companies would be more concerned about pick-up in execution activities to derive sufficient margin from improved operating leverage. We expect new projects awarding to pick-up in 2HFY21E. Whilst the National Highways Authority of India (NHAI) has awarded 1,330km of road projects in 1HFY21 as against the target of 4,500km for FY21, it looks to remain committed to exceed target in the coming months. Notably, 60% of total projects awarded in value terms are funded by the government.

Source : Equity Bulls

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