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Awarding, robust Dec’22 and healthy Q3; Near-term outlook bright

The Indian economy is exhibiting promising signals thanks to a sound banking system, robust tax collections and sufficient foreign exchange reserves. Gradually receding inflation (though core still sticky) also upholds the optimism regarding growth expectations. Resultantly, this fiscal year has had many more announcements and tendering than the last fiscal, their combined value already surpassing the previous best. With sturdy investment intentions, tendering seems set to persist. Despite a brief lull in awarding in Oct’22 and Nov’22, it swiftly returned in Dec’22, and the trend is likely to continue, leading up to the general elections in 2024. Yet, the fluid global scenario remains the key risk. With this, we present our review of Q3 ordering and estimates preview.

Q3 FY23 revenue, comforting growth. We see aggregate revenue growth for the 17 names reviewed in this report to firm up to ~15% y/y in Q3 FY23, from ~13% in Q2. The growth would largely be a function of gradually firming up pace of execution at recent orders. We see 15 of the 17 names reviewed to record higher revenues y/y, and the two outlier would be more the casualty of strained balance sheets (the two Sadbhavs). Sequentially, we see our reviewed universe to record ~10% higher revenues on a monsoon-impacted base.

Margins to expand, sturdy earnings performance. We envisage a ~14.3% blended margin for the 17 names discussed here, benefiting from the gradually rising share of the recently added orders with better margins, recent softening in prices of key inputs, and a gradual approval of further costs (for orders with escalation clauses). We envisage margins to expand, both, y/y and q/q. Adjusted earnings are likely to have a positive rub-off from greater revenues, mostly returned EBITDA margins, contained rise in depreciation and checked finance costs. The growth would be notwithstanding estimated lower other income

Overall awarding, Dec’22 surge leads to inspiring Q3. A sharp surge in Dec’22 ensured robust, ~Rs1.9trn, awarding in Q3, the strongest in last three quarters. With this, 9M awards scaled up to ~Rs5.2trn (up ~51% y/y) and make up ~96% of FY22 awards. Coal, with ~Rs576bn (9M: ~Rs1.1trn) held the pole position; Railways followed with ~Rs250bn (9M: ~Rs0.5trn). Roadways was at third spot with orders of ~Rs226bn (9M: ~Rs916bn). Such Q3 awards emanated from tenders of ~Rs4.1trn (up ~52% y/y), which in turn appear to have benefited from the strong ~Rs8trn of announcements (up ~92% y/y). Q3 figure are derived from 9M data.

NHAI, await year-end surge. With LoAs during Oct-Nov’22 for only ~85km, Apr-Nov’22 awards (based on LOAs issued) are estimated at ~2,415km. This is a 15% dip from the ~2,793km over the same period last fiscal, but item-rate contracts form a considerably larger portion this year. Hence, the value proposition, at ~Rs220bn, pales in comparison to ~Rs759bn over Apr-Nov last fiscal. With over Rs1trn of tenders already live, and a new chairman in place, we see awarding to surge during Dec’22-Mar’23 (as tends to be the case).

Preferred picks: Ahluwalia Contracts, HG Infra Engineering, KNR Constructions, NCC and PNC Infratech. Sturdy balance sheets and proven execution abilities are the key common traits among the picks.

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