JM Financial expects a strong a pipeline of road awards by NHAI in FY20-22 based on a basket of 26,000km to be ordered in the next 2-3 years under the Bharatmala plan, of which DPR's are ready or in final stages for 17,000km.
KNR Constructions shares rallied 7 percent and Ashoka Buildcon gained 3 percent intraday on Wednesday after brokerage house JM Financial initiated coverage with a buy rating on both stocks.
The research firm expects a strong a pipeline of road awards by NHAI in FY20-22 based on a basket of 26,000km to be ordered in the next 2-3 years under the Bharatmala plan, of which DPR's are ready or in final stages for 17,000km.
It also expects NHAI to continue leading the road sector capex since a majority projects under Bharatmala are large 4-6 large expressways, which normally come within its purview. "Also, funding is not a constraint with NHAI's healthy balance sheet (D/E of 0.8x as of September 2018)," it said.
However, JM Financial conservatively estimated a) NHAI ordering of 6,000km per annum (against 7,400km in FY18) and b) delayed execution for HAM projects already awarded.
Even under these conservative estimates the research house expects FY19-21 earnings at a CAGR of 11 percent for Ashoka Buildcon (18 percent CAGR in Bull case) but trading at 6x FY21 EPS, while KNR Constructions has 15 percent EPS CAGR in FY19-21 and trades at 10x FY21 EPS).
JM Financial views on road stocks
With a life time high orderbook, we believe ABL is at an inflection point, which can trigger at least 20 percent plus revenue CAGR in FY19-21E (versus guidance of 40 percent).
Despite assuming slow execution (20 percent sales growth) and 11 percent fall in NHAI ordering (versus FY18) in FY20-21, we find ABL delivering 12 percent CAGR in earnings (FY18-21) while stock trades at P/E of 6x FY21 (core EPC business).
Our bull case, which factors 40 percent sales growth as per guidance, implies 17 percent EPS CAGR in FY18-21. We value the stock at EV / EBITDA of 6x (50 percent discount to L&T) for the EPC business and NPV value of BOT (implied P/BV of 1.1x) for a target price of Rs 170 (44 percent upside). We initiate with a buy.
Given the life time high orderbook and good potential of inflows from NHAI in FY20-21 we find KNR having healthy visibility of revenue growth, though margins may taper off as the lucrative irrigation projects get completed by FY19.
Despite factoring lower margins and stable inflows of Rs 3,100 crore in FY20-21 we find KNR able to deliver earnings CAGR of 14.6 percent in FY19-21 period while stock trades at P/E of 10xFY21 (core EPC earnings).
We value that stock 6.5x EV /EBITDA (50 percent discount to L&T) to get to a target price of Rs 255 (17 percent Upside). Initiate with a buy.
While SEL appears optically cheap at 6x FY21 with an OB of 3.7x FY18 sales, these positives are offset by high D/E of 9x at a consolidated level. Barring cash inflows from stake sale SEL has a risk of further rise in debt to fund equity in its new HAM projects, which in turn are key for SEL’s revenue growth in FY20-21.
Additionally without fresh equity SEL will be handicapped in bidding for new HAM projects in FY20-21 given its already heavy debt. Hence despite cheap valuations and a large orderbook which can potentially lead to 15 percent EPS CAGR in FY19-21, we remain cautious on the stock and maintain hold.
At 11:20 hours IST, KNR Constructions was up 6.3 percent at Rs 233.35, Ashoka Buildcon up 0.84 percent at Rs 131.40, and Sadbhav Engineering up 3.71 percent at Rs 231.95 on the BSE.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.
Meanwhile, HDFC Mutual Fund acquired additional 2.05 percent stake in Ashoka Buildcon via open market on March 1, 2019.
