We have hand-picked five smaller companies that beckon investors ‘attention.
It is a good time for well managed smaller road construction companies as the reduction in competition (with large number of companies busy in repairing their balance sheet) throws up opportunities when the road sector is in the thick of action. We have hand-picked five smaller companies that beckon investors' attention.
Today, when the sector is opening up, the smaller companies have been able to scale faster and grab orders. On an average, these five companies that we have selected have grown their sales at 20 percent and profits at 40 percent annually over the last three years. And this could just be the beginning, with the government aiming to spend close to Rs 7 lakh crore over the next five years to develop 83,677 km roads including Bharat Mala Pariyojana worth Rs 5.4 lakh crore. There could be much more room for growth.
Strong order book add revenue visibility
This is also reflected in the order book. Most of the companies in this space are sitting on an order book of close to 3-4 times their sales which gives them the highest visibility in terms of the revenue growth. Backed by strong order book, most of these companies are expected to witness 20-25 percent growth in revenues over the next two years. Companies like J Kumar Infraprojects that largely operate in markets like Mumbai are sitting on order book of close to Rs 8,200 crore which is about 5 times its FY17 revenue, and thus provide the highest visibility in the sector. With major projects largely metro construction working on schedule the company is hopeful of delivering 25-30 percent growth in sales over the next two years.
Execution to drive growth
This is the market for companies with strong execution capabilities and prudent balancesheet management. Companies such as KNR Construction with strong execution capabilities operates with 35 days of receivables and 15 days of inventory generating strong cash, which is redeployed in the business. This is also the reason for its low debt-to-equity at 0.6 times and interest coverage of 8 times - one of the best in the industry, providing advantage to grab more projects. What is more, the company is sitting on order book of close to Rs 4,500 crore or 3 times its sales.
One other company that has taken advantage of this phenomena is the recently-listed HG Infra. Its order book has grown at 94 percent annually as in-house construction capabilities and owned equipment has helped faster execution without much pressure on the balance sheet. It operates at less than 1 times debt-to-equity. Its working capital days at about 35 is much lower than the industry average of 100 days. Moreover, with the infusion of the IPO money of about Rs 300 crore, it would be able to bid for the larger projects. The company is already sitting on order book of over Rs 4,000 crore or 4 times its FY17 revenues, providing strong visibility.
Hybrid opportunities
Of late, as against BOT (Build Operate Transfer), most of the projects have been announced in the HAM category (hybrid annuity model) where a part of the project cost is provided by the government, and the remaining is in the form of an annuity. Thus, the developer has much more leeway to scale and share the risk with the government. Among smaller companies, PNC Infratech and Sadbhav Engineering are quite active here with 12-13 percent market share each for the HAM projects awarded in FY17.
PNC, which has a strong balance sheet (less than 1 time debt-equity) is sitting on an order book of close to Rs 8,000 crore, which is almost 4 times its sales. Looking at its project pipeline and management guidance, the company is expected to grow its revenues at more than 50 percent annually over next two years. Sadbhav Engineering is a similar story with the expected revenue growth of 20-30 percent over the next two years backed by a strong order book of Rs 9,500 crore or about 3 times its sales.
Follow @jitendra1929