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* With re-election of a stable and pro-investment Modi government, we expect investor focus to shift from near-term earnings/orders to long-term revenue and earnings growth trajectory.
* With government thrust on infrastructure investments, project awarding has picked up over the last 2-3 years from segments like roads, urban infrastructure and buildings (mass housing segment).
* Within the infrastructure space, we prefer roads as an investment theme and foresee strong opportunity in this segment.
* NHAI and MoRTH put together have awarded projects worth ~Rs 3tn in last 5 years(FY15-FY19E). Our channel checks indicate NHAI awarded ~3,800 kms of projects worth ~Rs 721bn during FY19. In terms of the awarding mix, 71% was under the EPC mode and the balance under HAM. o Apart from NHAI and MoRTH, states have been strong enablers and have invested ~Rs 1.7tn during the same period [FY15-FY19]. The years FY18 and FY19 witnessed combined awarding of ~Rs 1.1tn, including key projects like Mumbai Nagpur Super Communication Expressway, Purvanachal Expressway, and KSHIP.
* The government’s Bharatmala Programme and a few big-ticket size state projects like Bundelkhand, Prayagraj, Elevated North South Corridor, and few HAM packages in Madhya Pradesh would give a further fillip to the growth engine
* Investors have two major concerns (a) Emergence of the unlisted space and (b) NHAI’s ballooning debt.
a) Private players took away a lion’s share in FY19 (EPC 88%, HAM 63%). Given that most listed players were facing challenges in achieving financial closure (FC) of projects they bagged in FY18, they refrained from further bidding. Secondly, unlisted players had an edge as the package sizes were lower and they also enjoyed a locational advantage.
* We have dug into the financials of a few unlisted players and believe FC will now go through a litmus test. We expect bidding intensity to cool off and see consolidation in the unlisted space.
b) Concerns on NHAI’s funding have remained an overhang as cess allocation in the budget was flattish (Rs 90bn-100bn), forcing the regulatory authority to borrow more debt; consequently, its leverage shot up from ~0.3x in FY15 to ~0.9x in FY19. NHAI is trying various other routes like Toll Operate and Transfer and InVITs to address these issues.
Our view: We believe NHAI will continue to be a major enabler (apart from respective states) for road segment investments. Given the liquidity crunch, equity commitments for HAM (~Rs 40bn) and stricter norms for getting appointed dates (AD), private players would now be passive participants and consolidate as they already have a sizeable chunk in the order pie. In the listed space, most players have a sizeable HAM portfolio which entails equity commitment. We believe companies with a lower order book base and strong balance sheet (less risk of equity dilution) would benefit the most. Top picks: KNR Construction, HG Infra, Sadbhav Engineering.
We Initiate: Long on H.G. Infra Engineering (TP Rs365) and Long on ITD Cementation (TP Rs122)
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