Deep dive into National Infrastructure Pipeline – much ado about data collation!
* The Finance Ministry has revealed an online dashboard showcasing 6,633 projects worth Rs128tn under the National Infrastructure Pipeline (NIP). Despite an appreciable attempt toward transparency, the dashboard lacks ease of access and requires painstaking effort to collate and analyze project information.
* We took the plunge and have collated details of Top-1,000 projects (~80% by value) to identify opportunities within various sub-segments. As per the data, <20% of the overall pipeline is close to tender-ready stage. We see niche opportunities for regional road EPC companies and metro rail contractors in the near term, while water, railways and affordable housing segments offer longer-term opportunities.
* L&T, KNR Constructions, PNC Infratech and Kalpataru Power are our top picks due to order visibility from NIP and relative comfort within the sector.
Key highlights from our analysis of NIP projects
* Out of Rs104tn of projects data that we have collated (remaining cost outlay of ~Rs95tn), only ~Rs37tn is in the development stage and <20% of overall pipeline is close to tenderready stage, with the remaining in either idea/nascent stage or already ordered out.
* Key segments in the Transport segment with DPR approved pipeline are: 1) roads with land-ready projects in states such as TN, AP and MP even as overall DPR-approved pipeline is just 0.5x of FY20 capex; and metro rail with Rs2.2tn of DPR-approved pipeline.
* Among other segments, longer-term opportunity exists in water, railways and affordable housing. However, most of the larger core schemes, such as Jal Jeevan Mission, river inter-linking and new DFC corridors, suffer from a top-down enumeration of opportunity without any concrete plans and project details.
* Energy has the largest share in development-stage projects but largely consists of thermal and renewable power generation projects that may face viability hurdles, in our view.
* Funding remains a key challenge even before execution and land acquisition, in our view. In our recent deep dive on Government finances and its impact on public spend on infrastructure, we estimated that the combined infra spending by the Centre and States is likely to decline to 5.5% CAGR over FY19-25E from 21% over FY13-19.
L&T, KNRC, PNCL and KPP are our top picks based on: 1) mediumterm opportunities under NIP, 2) existing orders, and 3) valuation
* We thus maintain that overall sector valuations are not compelling and our top picks are a factor of relative safety and specific niche segment opportunities as identified from NIP.
* L&T: medium-term pain due to slowing Government capex offset by likely market share gains and strong long-term pipeline across water, metro and railways; valuation comfort at ~11x adj. FY22E P/E (bottomed at 7x in 2008).
* KNR Constructions: strong pipeline of DPR-approved and land-ready road projects for ordering in its focus geographies; it is also perhaps the only construction name to generate consistent OCF/FCF in the past 10 years – trading at 8.6x adj. FY22E P/E.
* PNC Infratech: strong pipeline of DPR-approved road projects for ordering in its focus geography in UP; strong existing order backlog providing medium-term visibility – trading at 9.3x adj. FY22E P/E.
* Kalpataru Power: improving balance sheet metrics and steady medium-term visibility, along with a strong long-term pipeline of railway and T&D orders – trading at 7.3x FY22E P/E.
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