Construction of roads across the country has yet again assumed importance with the latest Reserve Bank of India’s (RBI’s) annual report for 2017 – 18 expecting the Indian economy to look up further going ahead, aided partly by infrastructure spending.
“During 2018 – 19, the infrastructure mission is set to accelerate. In the road sector, the key targets are awarding works for around 20,000 km length of national highways; construction of 45 km per day vis-à-vis 27 km per day last year; and developing ring roads around 28 major cities under the Bharatmala project,” the RBI report notes.
The government’s focus over the past few years, according to A K Prabhakar, head of research at IDBI Capital, has been on infrastructure, especially roads and rail. Companies, he says, have also benefitted from the new contract awarding system – the hybrid annuity model (HAM) – that ensures the capital is not stuck for a long duration in a particular project.
“That apart, there are incentives for companies to complete the project early. I like NBCC and Dilip Buildcon in the road construction segment,” Prabhakar adds.
Analysts at Phillip Capital agree and believe with 40 per cent contribution coming from NHAI under the HAM model, project execution is significantly de-risked.
“With the resolution of land acquisition problems, a new chairman, and the new pipeline (Bharatmala Paryojna) announced in late 2017, the order award activity in FY19 and beyond is likely to remain robust. We prefer NCC, Ahluwalia Contracts, JKumar Infra, Ashoka Buildcon, PNC Infra and Sadbhav Engineering in the road construction segment,” says Deepika Bhandari, an analyst in the institutional research division at Phillip Capital.
During FY18, the National Highway Authority of India (NHAI) awarded contracts for 7,400 kms, totaling Rs 1 trillion – up 70 per cent year-on-year (y-o-y), reports suggest. Along with those awarded by the Ministry of Road Transport and Highways (MoRTH), the total road contract awards for FY18 stood at 17,055 kms – 7 per cent higher than FY17.
A look at the stocks from the sector, however, paints a different picture with a number of these stocks underperforming the market in calendar year 2018 (CY18). On a year-to-date basis, NBCC, Hindustan Construction, Sadbhav Engineering, PNC Infratech and Simplex Infra have slipped in the range of 13 per cent to 64 per cent. Analysts attribute the fall to a sharp correction in the mid-and small-cap indices that have lost around 6 per cent during this period.
“The fall comes on the back of an overall correction in the mid-and small-cap indices. Despite the fall, these stocks are trading above what they were two – three years ago. That said, investors should remain selective while investing in this segment. Earrings visibility, manageable debt-equity levels and transparent management are some factors to consider,” says G Chokkalingam, founder and managing director at Equinomics Research.