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Improved construction activity; EXIM growth slows

Q2FY22 saw an improvement in both ordering and execution for the industry. However, order inflow trend for the listed space was not uniform with only a handful of companies reporting improvement. Execution recovery after the 2nd wave impact has been swift though will remain capped by monsoons in Q2FY22. We expect GR Infra, PNC, Ahluwalia Contracts, HG Infra and NCC (on low base) to report strong YoY execution growth. Margins are likely to remain stable or improve due to improved execution. Payment cycles remain stable QoQ though with delays persisting in known pockets of Telangana irrigation, AP and rural electrification. Port cargo volumes weakened due to lower coal and iron ore cargo as well as slower container cargo. PNC, HG Infra, G R Infra and Ahluwalia Contracts are our top result picks.

Tendering and ordering activity improved materially in Q2FY22

We have seen a strong revival in ordering/tendering activity in Q2FY22 after a weak quarter (impacted by Covid 2 nd wave). Order awards grew 27.5% QoQ to Rs927bn (up 14.6% YoY) in Q2FY22. Major beneficiaries in our coverage universe are L&T (Rs88bn) and NCC (Rs22bn). Tenders grew sharply by 55% QoQ to Rs2.1tn (up 22% YoY) led by Highways (up 57% QoQ) and Buildings (up 35% QoQ). Major tender issuing authorities were NHAI (Rs287bn, up 82% QoQ) and Bharat Broadband (Rs294bn).

Strong execution across the sector; working capital/leverage largely stable

Execution recovered well during the quarter with normal labour availability but will also remain capped owing to monsoons. EBITDA margins are likely to remain stable or improve QoQ due to improved execution. Margin pressure for KEC is likely to continue due to continued losses in SAE. With timely payments from most clients, we expect the working capital/debt levels to remain largely stable QoQ. Delays persist in Telangana (irrigation), AP and UP/Jharkhand electrification contracts.

Order inflows improved after weak Q1 but ask rate for H2 remains high

We saw improved order wins in Q2FY22 after the lull in Q1 though the recovery was not uniform across companies. Ashoka Buildcon, NCC and HG Infra reported good order wins while KEC, GR Infra and Ahluwalia reported moderate order intake. Order inflow was weak for L&T while PNC is yet to win any orders in FY22. We expect awarding momentum to strengthen in H2 which is also a seasonally strong period. Order backlogs of construction companies were moderate to strong (2-4x TTM revenues) as on June-21 with HG Infra/GR Infra specifically in need of a rather quick accretion.

L&T: Order inflows weak, but execution set to show strong recovery

Led by weak order announcements of Rs88bn (average of range) in Q2FY22, we expect E&C order inflows to grow by 7% YoY to Rs185bn on a low base (we assume some. Consolidated order inflows are likely to grow 7.7% YoY to Rs302bn. Key drivers are Infrastructure and Hydrocarbons segments. We build in 17% YoY growth (on a relatively impacted base) in E&C revenue, led by strong backlog and normalcy in execution. We expect E&C margins to improve 90bp YoY to 9%. We expect consolidated revenue to grow 15.4% YoY to Rs358bn, EBITDA to grow 17.2% YoY to Rs39.1bn, with EBITDA margin expanding 20bp YoY to 10.9%. We estimate PAT of Rs17.9bn.

Ports: Cargo momentum weakens for APSEZ; GPPL volumes likely to remain impacted

Adani Ports & SEZ’s (APSEZ) cargo (ex-Gangavaram) declined sharply by 9.8% QoQ to 68.2mt in Q2FY22 mainly on account of weak coal and iron ore cargo. Container cargo declined by 2.9% QoQ to 2.02mn TEUs in Q2FY22. We expect the consolidated EBITDA is to decline by 2.3% YoY to Rs22.5bn (PY included FX MTM gain of Rs4.5bn/ gain of only Rs295mn in Q2FY22E). PAT is likely to decline by 11.5% YoY to Rs12.3bn. GPPL’s cargo is likely to grow by only 7.8% QoQ on a low base (Q1FY22 impacted by cyclone) to 3mt in Q2FY22 (down 8.6% YoY). Container cargo is likely to grow 6% QoQ to 160k TEUs (down 5.5% YoY). We expect GPPL’s revenue to decline by 4.5% YoY to Rs1.7bn and EBITDA to decline by 6.3% YoY to Rs964mn, with EBITDA at Rs317/MT (up 2.5% YoY due to impact of tariff hike). PAT is likely to decline by 10.7% YoY to Rs468mn.

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