After taking a hit during the lockdown, prospects of a turnaround seem likely for construction companies, showing improvements in order flow and execution.
A lower cost of funding and rising toll collections are also positive developments that are likely to help the sector in its recovery. The increase in allocation for infrastructure in the government’s budget is also keeping the hopes of investors up, as far as future prospects go. However, not everything is hunky-dory. Debt reduction remains key for many companies in the sector.
During the first 11 months of the financial year 2021, tenders were issued for projects worth ₹7.1 trillion, according to data compiled by the Mumbai-based brokerage firm Antique Stock Broking Ltd. This represents a 42% growth over the same period last year and gives a fair amount of revenue visibility.
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In FY22, the National Highways Authority of India (NHAI) has plans to award road projects, spreading across 2,600km, under the hybrid annuity model (HAM) or engineering, procurement and construction (EPC) mode, analysts at the Antique Stock Broking Ltd said.
The increase in construction equipment orders by construction companies is another sign that bodes well and indicates that orders and execution is likely to pick up.
It also indicates that companies are anticipating a surge in execution, say analysts.
Besides, it’s not just road construction that are driving up orders. Water supply irrigation and other projects are also contributing to the improved order books.
The highest contribution came from the roads sector with orders worth ₹6,900 crore in February. However, the power sector contributed ₹3,500 crore, while coal and water sectors contributed ₹3,600 crore and ₹2,100 crore respectively. Overall, orders for the month of February stood at ₹ 20,300 crore. The fact that elections are due in some states is also likely to act as a helping factor.
“Executed well, the sector will see strong earnings growth for the next 1-1.5 years,” said Alok Deora, analyst, institutional equities, Yes Securities Ltd. However, it’s uncertain if the orders will translate into improved cash flows and project monetization. This will be a key factor for investors to watch out for.
The low cost of funding is helping the companies and, in turn, it will provide a boost to project execution. Even for NHAI, which has high levels of debt, growth in the sector will help. NHAI is planning to monetize ₹ 3 trillion worth of projects spanning 7,500km of roads, according to analysts.
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