IGI Logo

Seasonality was the reason for the overall softer Q2 FY23 awarding sequentially, though y/y growth in high single-digits means healthy assurance is set to continue. More encouraging are the persistent robustness of new investment intentions and the sustained tendering momentum. The two imply that H2 is likely to be significantly better than H1. With a reassuring opportunity landscape, the two key monitorables are continuing inflationary pressures (though key inputs have come off recent peaks) and the rising interest-rate environment (for this working-capitalintensive business). This, we believe, calls for caution, and we expect companies with a combination of strong balance sheets, measured growth and execution capabilities to gain prominence over growth-only stories or a valuation discount. With this, we present our review of Q2 FY23.

Q2 FY23 revenue, likely comforting. We see 14 of the 17 names considered in this report to have registered higher revenues y/y. For two of the three outliers, it would be more the casualty of the lower effectively-under-execution OB than any issues with execution abilities; the third, Sadbhav, continues to suffer owing to its strained balance sheet. Notwithstanding these three, blended growth is envisaged as a respectable ~13% y/y. Sequentially, we see the monsoon and absence of earlycompletion bonuses/arbitrations to have led to ~10% lower aggregate revenues.

Healthy margins, earnings to track operations. We envisage a blended margin of ~14% for the 17 names discussed here, benefiting from the recent softening in prices of key inputs, the gradually rising share of the recently added orders with better margins, and a gradual approval of further costs (for orders with escalation clauses). The envisaged sequential compression is mostly due to the absence of arbitration/claims. Earnings are likely to have had a positive rub-off from greater revenues, stabilising EBITDA margins and contained depreciation (limited capex).

Overall awarding, growing. Seasonality appears to have reduced Q2 awards ~13% q/q, but at ~Rs1.5trn it still was ~9% higher y/y. With this, H1 awards scaled up to ~Rs3.3trn (up ~39% y/y), and make up ~60% of FY22 awards already. Roadways continues to lead from the front with fresh awards of ~Rs346bn in Q2 (H1: ~Rs691bn); Coal followed with ~Rs338bn (H1: ~Rs550bn). Such Q2 awards emanated from tenders of ~Rs3.43trn (up ~57% y/y), which in turn appear to have benefited from the strong ~Rs8.8trn of announcements (up ~40% y/y).

NHAI, awaiting an H2 surge. Though Q2 bettered Q1 FY23, notable traction is likely toward Q4 (as tends to be the case). A part of the muted H1 was due to a combination of extended monsoons and the strong close to FY22 (efforts underway to get these moving at the earliest). Coming to Q2, the NHAI issued LoAs for 19 projects (incl. item rate contracts) against 16 the quarter prior. These 19 entailed a length of 559km (Q1: 458km) and an awarded cost of Rs135bn (Q1: Rs56bn).

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

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at  https://www.rathi.com/LeadGenerate/Static/disclaimer.aspx
SEBI Registration No.: INZ000170832

Above views are of the author and not of the website kindly read disclaimer