Road construction cos await project awards
PremiumGiven that most contracts have a cost escalation clause, higher input costs may not pose a serious threat to builders
Construction companies are likely to deliver mixed results for the December quarter (Q3FY22). Their performances in Q3 would depend on geographical presence, order mix, liquidity issues and fixed costs. The construction ban in Delhi to curb pollution may hit some. Analysts expect PNC Infratech Ltd, Ashoka Buildcon Ltd and KNR Constructions Ltd to put up a good show.
True, rising raw material (steel, cement, etc.) costs pose a concern. But given that most contracts have a cost escalation clause, higher input costs may not pose a serious challenge, according to Naveen Kulkarni, chief investment officer, Axis Securities. He added the sector will report better year-on-year numbers.
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Hereon, the outlook appears decent for construction companies as they have a good order book to support execution. Companies such as Ashoka Buildcon, Dilip Buildcon and KNR Constructions have strengthened their balance sheets with sales and monetization of some assets. This helps execution and bidding ability.
Rising toll collection is positive for toll road operators and build operate transfer (BOT) projects. FASTag-based toll collections have picked up in Q3FY22 and clocked record high monthly collections in December, suggests analysts’ data.
“The healthy growth in toll collections far outweigh the increase in maintenance costs resulting in a good improvement in debt service coverage ratio numbers for BOT toll road assets which otherwise got moderated to an extent due to covid impact," said rating agency ICRA Ltd.
As such, the March quarter (Q4), which is already strong for execution, may prove to be better. There are some concerns over the Omicron’s spread, and the potential threat of full lockdowns persists.
With execution prospects improving, all eyes are on good order inflows. Parikshit Kandpal, analyst at HDFC Securities Ltd said: “Ordering has been muted and cornered by unlisted peers, and we expect a pick-up from Q4FY22 with listed players winning a larger part of ordering."
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Kulkarni said, “NHAI relaxed pre-qualification criteria which enabled other players to bid for the projects. These relaxations were applicable till 31 December, so we expect organized players to get more orders as we go forward and expect ordering to pick up in Q4."
Meanwhile, expectations remain high on the government increasing infrastructure spending in the budget. The budget will drive sentiments for construction stocks this result season, said analysts.
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