Healthy growth visibility for road contractors in FY23-24: IIFL Capital Services

18 Aug 2022 , 10:56 AM

Healthy execution with margin contraction in Q1FY23

Road contractors under coverage reported healthy revenue growth in Q1FY23, supported by receipt of appointed dates for HAM projects. GRINFRA reported the slowest growth of 10% adjusted for bonus receipt during the quarter. However, elevated RM costs weighed on all players witnessing subdued margin levels (adjusted for bonus receipt for PNC and GRINFRA). Managements maintained growth guidance for FY23, but hinted at better profitability going ahead, amid ongoing softness in RM costs.

Order book provides growth visibility; large inflow pipeline:

Reported order book for all contracts had expanded in Q4FY22 amid ordering pick up by NHAI. During Q1, order books declined QoQ except for HG Infra (large EPC order from Adani) and Ashoka Buildcon (multiple wins from new sectors). While existing under- execution order book is smaller, receipt of AD by end Q4FY23 for balance HAM projects won in Q4FY22, will ensure growth remains healthy in FY23 and FY24. NHAI award pipeline remains large even as ordering in 4 months of FY23 has been slower than previous two years.

Moderation in competition would be watched

Key for large, listed players is tightening of terms for new road tendering, where lower government grant for HAM should help along with cap on bid capacity. Most players are now diversifying into other sectors where results are visible for ASBL, PNC, KNRC and DBL. GR and HG are yet to see meaningful gains here.