Execution on track and healthy visibility in Infrastructure sector: IIFL Capital Services

1 Jun 2023 , 11:13 AM

Q4FY23 saw healthy execution for all construction contractors, baring GR Infra, with few disruptions for the under-execution order book. General contractors outperformed road contractors. Margins were stable and healthy, except for Ashoka; with companies indicating the current levels to stay. Incremental wins in Highways, Railways and Ropeways meant that the starting order book for FY24 provides healthy growth visibility (higher for general contractors). Analysts of IIFL Capital Services preferred picks are HG Infra and PNC among Road players and Powermech Projects.

Healthy revenue growth trajectory in Q4: 

Revenue growth for majority of construction names under our coverage was on track for the under-execution order book (OB). Ashoka Buildcon and HG Infra posted strong upticks, while KNR and PNC saw stable growth of 12- 14%. GR Infra posted a decline in a large base in Q4. All the three general contractors posted strong 25-30% growth in Q4 with execution across under-execution projects picking up. In terms of full year FY23, barring GR Infra where revenue was flat on lower under-execution order book, growth for all others was largely on track given the healthy order book.

Margins stable and healthy for all, except Ashoka: 

KNR Construction and HG Infra have demonstrated stability in Ebitda margins all through the past couple of years, despite RM price volatility. Other companies have seen weakening due to RM price impact, weaker mix due to new forays or due to aggressive bidding. Companies are guiding to stability in margins going ahead, as RM prices have stabilised. General contractors have demonstrated recovery in margins, especially in past few quarters, led by stronger execution and stability in RM prices.

Order book provides visibility as elections near: 

Order book for GR Infra and PNC Infra jumped QoQ, helped by healthy awards in Q4 (roads and ropeway for GR, roads for PNC). Ashoka saw a jump from wins in the Non-roads sector. HG Infra remains best-placed with the highest book-to-bill among Road contractors. Growth visibility for general contractors is much better, led by large order books and strong govt focus on timely execution. All contractors highlight intense competition for Highways, but an expanding project pipeline of State road projects, Urban infra and Water supply projects under JJM. While awarding may slow down near elections, companies seemed not too worried about the impact on operations.