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Resilient performance

Infrastructure companies performed largely in line with or better than expectations in Q2FY22. Ordering activity improved in Q2 though the improvement was not uniform across all companies. Execution was strong YoY but in some cases was impacted QoQ due to seasonality/monsoon while margins remained largely stable. Operating cash flows were negative for several players in H1 due to normalization of working capital levels (exceptionally low in Mar-21). APSEZ’s cargo volumes were buoyant but GPPL’s container volumes continued to be weak. We expect further recovery in ordering/execution environment in H2.

Highway awarding picks up in Q2; mixed inflows for listed players, but backlog strong

Highway awarding improved in Q2FY22 after remaining weak in Q1. It stood at 4,609km in H1FY22 (vs 5,052km in H1FY21). Highway construction stood at 3,824km in H1FY22 (vs 3,950km in H1FY21). The Ministry (NHAI + MoRTH) targets to award 11,000km in FY22 (vs 10,965km in FY21). Order inflows for our coverage universe were mixed. While KEC/HG/NCC saw strong order inflows of Rs30bn/Rs26bn/Rs24bn, PNC/GR have received nil inflows in Q2FY22. Having said that, backlogs for most companies are moderate to strong, with book to bill of 2.5x-4x TTM revenues, except for PNC (2.3x) and GR (1.8x).

Execution remained strong; margins largely remained in-range in Q2FY22

Construction companies reported strong execution growth YoY in Q2FY22, driven by strong order backlogs and optimal labor force. However, we saw some moderation on a QoQ basis due to monsoon/seasonality. Companies like HG, KNR and PNC posted stronger than expected execution and earnings growth. EBITDA margins in Q2FY22 were largely in range for most companies except KEC, whose margins were impacted (down 190bp YoY to 7.1%) by losses in SAE. HG Infra and Ahluwalia Contracts have upgraded their revenue guidance for FY22, led by strong H1, while Ashoka lowered its annual guidance due to moderate H1 amid delay in appointed dates for new projects.

Working capital levels rise on low base, leading to negative OCF; debt levels inch up

Operating cash flows were negative for most companies in H1, led by normalization of working capital (exceptionally low in Mar-21). Also, there were some payment delays faced by companies in few state government contracts. KNR’s irrigation receivables rose from Rs6.5bn in Aug-21 to Rs7bn in Nov-21, but it remains confident of recovery by Mar22. Net debt for EPC companies increased from Mar-21 levels due to higher NWC levels. KEC’s net debt increased from low base of Rs17bn in Mar-21 to Rs28bn in Sep-21, but it is confident of bringing it down to guided levels of ~Rs25bn by Mar-22.

L&T – execution strong; robust recovery in order inflows in Q2

L&T’s consolidated order inflows grew sharply by 50% YoY to Rs421bn. E&C order inflow grew 73% YoY to Rs301bn. Order prospects for H2 are buoyant at Rs6.83tn, driven by Infrastructure (Rs5.3tn) and Hydrocarbons (Rs1.2tn) verticals. Order backlog grew 10.6% YoY to Rs3.3tn (3.2x TTM revenue). E&C revenues grew by 11.6% YoY to Rs228bn while E&C margins grew 110bp YoY to 9.2%. Infrastructure margins grew 190bp YoY to 8.3%. Working capital levels contracted by 90bp QoQ to 22% in Sep-21.

Ports: APSEZ cargo declines sharply QoQ; GPPL’s container volumes remain weak

Adani Ports & SEZ (APSEZ): Cargo (including KPCL) was down 9.7% QoQ to 68.3mt (up 21.5% YoY) due to lower coal volumes, even as container cargo remained flat QoQ. Average realization grew 1.8% YoY to Rs440/MT. Port revenue/EBITDA grew 24%/22% YoY to Rs30.1bn/Rs21bn. Port EBITDA margin grew by 0.7% YoY to Rs308/MT. APSEZ has maintained its volume guidance of 350-360mt for FY22.

Gujarat Pipavav Port (GPPL): Cargo grew by 11.5% YoY to 3.7mt, driven by sharp 53% YoY growth in bulk volumes (led by incremental cargo from Ultratech). However, container volumes continued to be weak, declining 6.5% YoY to 157k TEUs due to loss of market share on the West Coast. Revenue grew by 6.6% YoY to Rs1.95bn while EBITDA grew by 5.9% YoY to Rs1.1bn. EBITDA margin declined by 5% YoY to Rs294/MT. Recurring PAT declined by 2.2% YoY to Rs513mn.

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