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Infra push by government, localised lockdown risk persist

Project execution is limping back to normalcy as per expectations, though there is a concern on more localised lockdowns and slowdown due to social distancing norms. Public sector ordering traction is gradually picking pace albeit slowly; however, large private and core sectors are in a wait-and-watch mode. The recent spurt in terms of Covid infections and calibrated measures taken by certain state governments are likely to impact the pace of growth recovery. Pro-growth budget announcement with focus towards deficit spending on infrastructure is likely to crank up public sector demand. We factor-in revenue growth of 25.7% YoY in Q4FY21E for our coverage universe, given the low base of Q4FY20. Over a lockdown impacted low base, PBT will jump 77% YoY, and EBITDA margin is likely to expand by 230bps. Our top picks are L&T, AIA Engineering and KEC International.

* Pro-growth budget with focus on infrastructure to propel investment: Government has made it very clear on their impetus towards investments despite the widening deficit. Hence, we believe, there will be an urgency to fast track some large projects, bidding of new projects and overall increase in outlay towards infrastructure.

* Risks due to localised lockdown given the rapid increase in pandemic looms: The economy is limping back to normalcy with improvement in project execution and gradual increase in utilisation levels. However, recently we have witnessed a spurt in the reported infections due to the coronavirus pandemic forcing some state governments like Maharashtra etc. to introduce calibrated restrictions and might even escalate to a lockdown. However, we believe, the impact on infrastructure projects should be limited keeping an eye on the overall impact on growth.

* Strong growth prospects; however, near term growth risk due to pandemic: Execution of projects is gradually returning to normalcy and we expect the overall utilisation to improve. Infrastructure and efficiency improvement may be the major pillars, which will support the overall growth. Industry focus will be on maintaining a healthy balance sheet by prioritising collections; hence, we prefer companies with strong balance sheet and cashflow focus. Hence, our top picks are L&T, AIA Engineering and KEC International.

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