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The Infrastructure sector is seeing signs of pick-up – Capex by the central government is up 48% YoY, state capex has normalized with increased focus on irrigation/water supply (rise in new project announcements by Andhra Pradesh and Maharashtra) and initial signs are brewing of a rise in capacity enhancements by large conglomerates indicating potential business for engineering and construction plays. In international markets, projects from the Middle East are buoyant. New awarding witnessed across sectors – roads, buildings, marine, metro, minerals, T&D, water, and telecom –have led to diversified EPC plays emerging as key beneficiaries.

We remain optimistic in the near term due to a large opportunity pipeline across subsectors. For Elara Infrastructure universe, we expect a FY24-27E revenue CAGR of 12%, an EBITDA CAGR of 12% and earnings CAGR of 15%. The sector is currently trading at a comfortable average of 11.6x FY27E P/E. Our top picks in the sector are diversified EPC companies such as NCC (NJCC IN) and Afcons Infrastructure (AFCONS IN).

Diversified EPC better placed than focused road EPC players: Within Elara Infrastructure universe, diversified EPC plays such as NJCC, Larsen & Toubro (LT IN), HCC and AFCONS witnessed healthy order inflow. In fact, NJCC and LT surpassed fullyear guidance with strong inflows worth ~INR 208bn and INR 600bn in Q4, respectively. LT’s inflows were bolstered by international orders, which formed 60% of the total announcements, led by an ultra-mega order in the hydrocarbon division from Qatar. For NJCC, order inflows were led by BSNL and the transportation division, which contributed 53% and 33%, respectively. AFCONS received an inflow worth INR 23bn in Q4 and has pending L1 status on orders worth INR 141bn (delayed due to land acquisitions). Road focused EPC companies such as PNCL, HG Infra and ASBL may have underachieved their lower end of guidance by 24%, 19% and 2% respectively.

Expect inflows for Elara E&C Infrastructure universe at ~INR 830bn (up 11% YoY) in Q4FY25E. Our calculations show an average orderbook, as of Q4FY25E (including L&T), at INR 818bn (up 19% YoY), with an average book-to-bill ratio of 2.7x.

Q4 execution slower than usual: Although new project announcement was healthy, delay in receipt of appointed dates, land acquisition approvals and payments from government authorities may impact execution in Q4FY25 versus a usual seasonally strong Q4. About 82% of the total project awarding worth INR 1.2tn by the Maharashtra state government is yet to be converted into LOA. Overall, for Elara Infrastructure universe, we expect an average revenue decline of 12% YoY, largely led by lower executable orderbook for KNR Construction, delay in payments for Jal Jeevan Mission impacting NJCC, PNC Infratech and LT. The only exception is HG Infrastructure, wherein we expect a growth of 7% YoY, led by contribution from solar projects.

Average EBITDA margins are likely to be range-bound at 11% on account of stable material prices of steel and cement.

For Praj, await government decision on increasing ethanol blending rate: Ethanol blending rate has reached 19.5-20%, largely led by grain-based ethanol. Await the government decision on increasing petrol blending rate to 25% or more to open up new order opportunities for Praj. For Q4E, we factor in a 6.5% growth in inflows to INR 10bn and flat revenue with EBITDA margin at 8%.

Road projects – High competitive intensity: After a tepid show in 10MFY25 at 4,204kms (flat YoY), in January 2025, awarding by the MORTH was up 108% YoY to 1,104 kms. However due to competitive intensity, small/unlisted EPC players were beneficiaries, with bids ~25-30% lesser than the quoted price. The authority is working towards improving the quality of roads and is planning to implement stringent bidding rules in the near term.

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