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A slowdown or just an interim blip?

Some cooling in order inflows in the last two months, post a strong 1HFY23

* After a strong inflow during 1HFY23, awards have seen lower growth from Sep-22 to midNov-22. While inflow growth during 1HFY23 on YoY/4-year CAGR basis stood at 86%/8%, it registered at 27%/4% in Sep-Oct ’22, respectively. This was lower vs Q2FY23 (33% YoY and 7% on 4-year CAGR basis).

* Importantly, a major part of the lower growth is due to poor awarding in the Roads sector; while awarding in the sector has been mildly low (2% decline on a 4-year perspective), it plunged by 25% during the Sep-Oct ’22 period. Ex-Roads, the 4-year CAGR has marginally moderated, from 11% to 9%, largely owing to softness in ordering on the Watersupply front. Mining, Power Equipment and Railways continue to clock strong growth.

Momentum in project tenders endures

* While growth on the awarding front has cooled down a tad in the last few months, the momentum in project tenders has sustained.

* Tenders logged a 4-year CAGR of 13% over Sep-Oct ’22 as against 15%/13% for Q2FY23/Q1FY23. Power T&D, Water supply and Irrigation have trailed a strong growth trajectory in the current fiscal.

* The tenders-to-awards conversion rate (ex-Roads) stood at 33% during Sep-Oct ’22, down from 44%/52% in Q2FY23/1HFY23.

Center’s capex momentum continues; States still not firing

* The Center has maintained its strong capex momentum; during Apr-Sep ’22, its capex growth stood at 50% YoY/21% on 4-year CAGR basis. Capex for Railways and Roads has grown +90% and +65% YoY, respectively. Overall, ~46% (39% during 1HFY22) of the budgeted capex has been carried out in the first six months of FY23. The Sep-22 capex at Rs900bn is considerably healthy.

* Till Sep-22, capex by key States saw ~2% YoY growth – which is a 6% YoY decline in 1QFY23 and 6% YoY growth in 2QFY23. States have spent ~25% of their budgeted capex during 1H which was ~31% during the same period last year. Capex by States in general was lopsided in the second half and, hence, there is a similar expectation this fiscal too.

Growth in credit to industries at ~15% YoY and that to infra at ~12%

* Credit to industries has steadily increased in FY22, after trending flat for a few years. Credit to industries and infrastructure has grown by ~15% and ~12% YoY, respectively. However, in absolute terms, growth has remained nearly flat since Feb-22 till August-22. Notably, on MoM basis, since Mar-22, the highest increase (Rs450bn) in credit to Industries was seen in Sep-22. Credit to industries, as a percentage of overall non-food credit, still remains extremely low, at ~26%.

Our view

* We increase our FY24/FY25 EPS estimate by 4/6% for LT. Our Dec-23 TP now stands at Rs2,215/share (earlier Rs2,131); we maintain BUY. We also maintain our positive view on KEC (TP: Rs505), KPTL (TP: Rs565), ACE (TP: Rs345) and HG Infra (TP: Rs820), with a BUY on all. Overall, we maintain our positive view on the sector, driven by its strong tender pipeline, softening commodity prices and expectation of good order inflow growth.

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