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Road sector update

In our view, measures from government such as a) pickup in awarding activity, b) reducing the bank guarantee as performance security, c) shifting of payment from milestone billing to monthly billing and d) faster resolution of disputes has helped infrastructure companies during tough times of pandemic. With ease of commodity inflation and government’s thrust on infrastructure spending (Rs2trn road budgetary allocation) we expect the awarding to remain robust in FY23. For Roads, we have witnessed awarding activity of 101kms awarded in YTDFY23 vs (303kms awarded in YTD22). Further we were excited to see the live upcoming bid pipeline of Rs254bn plus from NHAI spread across various segments such as EPC (Rs165bn), HAM (Rs66bn) and BOT (Rs23bn).    With huge projects coming under roadways (MP, Karnataka, Haryana, Tamil Nadu, Bihar, UP, etc) including Metro projects and Irrigation & Water Infra projects these sectors are likely to witness good traction in awarding activity. along with building quality infrastructure.  

In FY23, NHAI aims to speed up the construction activity to 48kms per day and it plans to award 8,700 kms in FY23E vs (6,306kms in FY22). We tried to understand NHAI’s upcoming bid pipeline and nature of awarding. NHAI’s tender pipeline remains strong with over 34,732 kms to be awarded, giving huge opportunities for the road players to tap over the next 2?3 years.  Of this, 28% of the projects would be on HAM mode, 12% on EPC mode, 2% on Item rate, 1% on BOT (Toll) while 58% of the projects are yet to be decided by NHAI. Awarding under BOT projects have been almost non? existent in the last few years as private investors refused to take risk. In

Currently, the active tender stands at ~Rs254bn which are scheduled to be awarded over next 3?4 months giving further comfort to the sector. Of this, 65% are on EPC mode, 26% on HAM mode while balance 9% are on BOT (Toll) mode.

NHAI witnessed aggressive bidding in H2FY22 under HAM model with easing of minimum net worth requirement and waiver of bid security for bidders of roads and bridges. The share of unorganized players rose in projects awarded (as bids were at a substantial discount to NHAI`s base price) and has increased the risk of delays and stalled projects. As the economy has revived, NHAI seeks to tighten criteria for bidders going ahead. With the expectations of NHAI going back to normal bidding norms, organized developers are likely to witness healthy inflows.

On the back of National Infrastructure Pipeline (NIP) outlining a robust plan of Rs111trn capital investment over next 5?6 years, along with Roads, sectors like Urban Infra, Railways, Buildings and Water Infra too would remain in focus over the next few years. Further, Govt. emphasis on PM Gati Shati Master Plan of bringing synergy in infrastructure development with capex allocation of Rs7.5trn is expected to drive the economic development through seven engines namely, roads, railways, airports, ports, mass transport, waterways, and logistics infrastructure giving much needed impetus awarding activity across sectors.

Our View: With NHAI’s plans of tightening the bidding criteria and bid pipeline of 16,284 kms to be awarded in next few months, we expect organized players to bag healthy orders in FY23.  The government’s strong infra push by NIP, GATI Shakti and Budget 2022?23, rising toll prices, most infra companies having robust order book and healthy bid pipeline are expected to witness a strong profitability with improved return ratio’s. We continue to prefer companies with strong balance sheet, low debt levels, good corporate governance, well managed working capital cycle and high book to bill ratio which provides a robust revenue visibility over next 2?3 years. GRINFRA, KNR HGINFRA and are our top.

Key investment rationale on Top Picks:

GR Infra Engineering

* In?house integrated model of design and engineering team and owned construction equipment base gives GRINFRA a competitive edge over its peers

* Robust order inflows leading to comfortable order book?to?sales  

* Lean balance sheet despite exposure to HAM portfolio

KNR Construction

* Robust order book  

* Strong beneficiary from the ongoing uptick in infra sector  

* Focus on monetizing of HAM assets   thereby strengthening the balance sheet

HG Infra Engineering

* Transition into full fledge contractor  

* Robust order inflows leading to comfortable order book?to?sales  

* Lean balance sheet despite exposure to HAM portfolio

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