Q3FY24 Review: Infrastructure: Awarding critical for growth now

15 Feb 2024 , 03:28 PM

Q3FY24 was a mixed quarter with larger under execution order books driving faster growth for HGInfra, Ashoka, NCC and Powermech while others suffered. Incrementally, pick up in highway awards is now critical with little clarity on timing despite a large pipeline. Diversified players like NCC, Powermech are better placed vs road contractors. We continue to like Ashoka as well. Pick up in awards with reasonable competition would be a key trigger for rerating of other names like KNRC, PNC, GR Infra. 

Divergence in OB dictating revenue growth: 

Q3FY24 was a mixed bag in terms of revenue growth for mid cap EPC players with divergence in order inflow and order book trends reflecting in variations in growth & margins. HG Infra, Ashoka, NCC and Powermech posted healthy growth YoY backed by large order books even as growth was subdued for others. Margins were relatively stable (except for GR Infra) with pressure from RM fading but that from orders won amidst intense competition still hurting. 

Pick up in highway awarding critical for growth visibility: 

Book to bill ratio on trailing 12m revenues continued to weaken for highway contractors (GR saw a rise due to 10% fall in 9M revenue). Commentary by managements varied with some being confident on an uptick before model code of conduct kicks in while others betting on awards only post new government. Large pipeline of ~46,000 km provides comfort but competition remains intense. Almost all are open to bidding for BOT (Toll) projects highlighting more conducive contract terms. 

Diversified names like NCC and Powermech are better placed: 

NCC has benefited from healthy awarding with book to bill of 3.4x providing much stronger growth visibility over the medium term even as govt’s infra capex allocation sees a shift. We prefer both these over the road focused contractors. Ashoka Buildcon too is preferred pick given relatively better multiple.