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Tendering activity picks up in Roads, Rail and Water

This report is a monthly update on project tendering & awarding activity in the infrastructure space. We assess trends for YTDFY22 (till Jul’21).

Tendering Activity

* YTDFY22 (till Jul’21) tendering saw 8% YoY growth on the back of higher tendering in the Power and Railways segments. While tendering in the Road segment was flat, Water and Real Estate saw a decline.

* The Road segment accounted for the largest share of tenders, ~27-30% of overall tenders. Water/Railways/Irrigation tenders accounted for 11-14%/~7%/6-16% of total tenders during the Apr-Jul’21 period.

* It is important to note that tendering activity in Jul’21 was near a 2-year high of ~Rs960bn, driven largely by ~Rs29bn of tendering in the telecom segment by Bharat Broadband Network. On a TTM basis (Jul’21), tendering reached ~Rs800bn, which is at similar levels to FY21.

Awarding Activity

* YTD awarding activity saw more than 50% YoY growth on a low base. The 2-year CAGR for this period stood at 21%. Road/Power T&D/Railways/Real estate witnessed strong growth. Excluding the Road segment, the 2-year CAGR for tenders stood at a mere 4%.

* Apart from Roads, the Railways segment has also seen strong growth in recent years in terms of awards. Roads/Railways constituted 29%/15% of the awards during Apr-July’21.

* On a TTM basis (Jul’21), awards have reached ~Rs380bn. Roads/Railways/Water Supply formed 23%/19%/7% of the overall awards during this period.

Central & State Capex, Industrial Credit

* For the Apr-Jun’21 period, the Central government achieved 20% of its annual budget target (Exhibit 35) with an outflow of ~Rs1.11tn (up 26% YoY), similar to last year.

* While the overall Central government capex growth during Apr-June’21 stood at 26% YoY, key ministries, Housing, Roads and Railways, reported growth of ~3x, 2x and 26%, respectively. Clearly, these sectors, along with Defense, are in the focus for the government.

* Additionally, state government spending (top 15 states) at Rs517bn during YTDFY22 (up more than 100% YoY) has been far higher than last year’s spending - 11% of BE has been achieved vs. 6% YoY). On a combined basis (Central + States), capex growth stood at ~47% YoY.

* Credit growth to industries fell negligibly by 0.3% YoY as of Jun’21, while infrastructure credit grew 2.2% (Exhibit 36). At Rs10.92tn, outstanding infrastructure credit is at its historical high, though it has been in the Rs10-11tn range for the last two years. Overall industrial credit outstanding (as % of non-food credit) has gradually declined to ~27% as of Jun’21 and currently stands at a decadal low (Exhibit 38). During FY10-FY15, it was ~45%.

Top picks from Emkay coverage

* Our top picks in the sector are LT (TP Rs1,870), KEC (TP Rs490) and KPTL (TP Rs560), considering their superior execution capabilities, existing order backlog, and relative valuations. LT core (ex of IT/Finance/Developmental) trades at ~15x Sep’23E EPS.

* Some companies, like Siemens (Under Review) and JMC Projects (Not Rated), saw strong order inflows. Siemens had an inflow of Rs43bn vs. a Rs30bn run rate, leading the order book to an all-time high of ~Rs143bn. JMC bagged orders worth Rs47bn YTD, with an order book of Rs160bn.

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