Road project awarding poised to pick up ahead amid strong award pipeline!

What's Buzzing?

Road construction companies have faced dismal order inflows in M9FY23 amid muted NHAI awarding. Now the key question is what’s the way ahead!

Context:

Road construction activities during 9MFY23 were affected largely by elevated level of input prices, labour shortages along with heavy and prolonged monsoon period. Due to these, Ministry of Road Transportation and Highways’ (MoRTH) construction pace has tapered to 5774 km of National Highway during 9MFY23 vs. target of 12000 km in FY23. Further, the overall road project award figure has also been relatively muted at 7263 km during the same period vs. the overall target to award ~12,000 km of road projects during FY23. The companies have also faced competition from smaller players (amid relaxed bidding norms by NHAI) and have stayed away from bidding aggressively to protect margins.

Our View:

Within the Infra sectors, Roads (a key element in overall focus on logistics – Capex CAGR of 25% in last 5 years and likely healthy double-digit growth ahead) is likely to be in sweet spot. We highlight that currently the order book (OB) position for majority of EPC companies under coverage remains decent (overall OB/TTM revenue at ~2.5x). Nonetheless, order inflows are key for growth visibility, especially in FY25 and beyond. Note that NHAI has lined up over 100 projects of ~Rs. 1.1 lakh crore for ordering over the next couple of months. Thus, there is high likelihood that most of the EPC players would witness a decent order inflow traction ahead, given the huge awarding pipeline. Furthermore, as per the media reports NHAI is also considering putting a minimum BBB rating condition for bidders in hybrid annuity model (HAM) projects. Presently there is no minimum rating requirement on bidders for taking up HAM projects. The requirements if implemented will boost the relatively bigger players. We continue to prefer EPC players with strong order book visibility, healthy execution record and robust balance sheet like PNC Infra, HG Infra and KNR Construction.