Sector Update - Roads and Construction - ICICI Direct

The roads and highways sector has demonstrated strong resilience to the Covid-19 disruptions with robust ordering activities (NHAI awarded 1,330 km in H1FY21; up 1.6x YoY) and improving construction pace. Additionally, measures such as a) shifting from milestone-based billing to monthly billing, b) releasing of retention money/performance security in proportion to execution, c) faster resolution of disputes through reconciliation and d) revision of model concession agreement (MCA) for HAM and BOT projects ensured continuance of gained momentum and safeguarded contractor's interest in the uncertain times. Going forward, we expect healthy traction to continue in the near to medium term with the visibility provided by NHAI's strong bidding pipeline - totalling 2,655km (Rs. 71,199 crore; to be awarded till February 2021). Likewise, we expect order book for most efficient road players to increase, thereby placing them in a comfortable position to deliver growth in coming years. On an overall basis, we believe KNR Constructions and PNC Infratech, from our coverage universe, are better placed companies in construction backed by their strong order book positions, availability of enormous opportunities in the operational regions, robust execution skills, elevated margin profile and lean balance sheet position.

PNC, KNR remain our top picks

We introduce FY23 earnings estimate for our Construction universe companies and roll over our valuations. We believe KNR constructions and PNC Infratech, from our coverage universe, are better placed companies in the construction backed by their strong order book positions, availability of enormous opportunities in the operational regions, robust execution skills, elevated margin profile, and lean balance sheet position. We maintain BUY rating on KNR Construction and PNC Infratech with target price of Rs. 375/ share and Rs. 220/ share, respectively. Concerns on stretched debtor days for NCC and overhang on SBI-Macquarie deal for Ashoka Buildcon, restrict us from turning constructive. We maintain HOLD rating on NCC and Ashoka Buildcon with target price of Rs. 65/share and Rs. 95/share, respectively.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_RoadCons_SectorUpdate_Dec20.pdf

Source : Equity Bulls

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