Is Road Contractors Segment Seeing a Recovery?

All major road contractors have reported healthy recovery in execution during 2QFY21 on account of labour and RM availability improved. Margins have largely remained flat, in spite of Covid19-related headwinds. The order book for road contractors is healthy at 2.5-6.3x book-to-bill which, coupled with the receding monsoon, improved labour and supply chains, should support healthy execution in 2HFY21. Healthy pipeline to be awarded by the NHAI in the remaining year should aid medium-term growth visibility.

Strong execution in 2Q:

Revenues for road contractors sharply recovered in 2Q, due to easing of Covid19 restrictions across regions. Labour-force availability as well as logistics constraints relating to raw materials improved QoQ and led to healthy execution during the quarter.

Margins have been stable:

Despite the significant disruption due to Covid19, Ebitda margins for road contractors have largely remained stable in the past two quarters. Higher share of irrigation contracts, projects nearing completion and pick-up in execution have supported margins during 2Q. We expect margins to be stable in 2HFY21, supported by improving execution at the high-margin, captive HAM projects.

Labour availability back to pre-Covid levels:

 Following the Covid19 lockdown in April-May, execution of road and infra projects were impacted by the unavailability of adequate workforce, given the migration back to their home towns. The situation started improving in June-July and has returned to normalcy for most road contractors.

Order book remains healthy for all road contractors:

Order book for most contractors remains healthy, at book-to-bill of 2.5-6.3x, thereby lending healthy growth visibility over the next few quarters. Many contractors including DBL, KNRC, ASBL and SADE have won projects recently as well. Furthermore, many HAM/EPC projects are yet to secure appointed dates (PNCL has Rs90bn worth of projects, where AD is pending).

Pickup in order awarding likely in 2HFY21:

NHAI has awarded 40 projects of 1,330km, worth Rs472.9bn, in 1HFY21. Overall, MoRTH has awarded projects of 5,052km in 1HFY21. NHAI targets awarding 4,500km of highway projects in FY21. We expect healthy awarding in coming months which should further improve order book for road contractors.

Recommendations:

KNR Constructions Ltd (KNRC), PNC Infratech Ltd (PNCL) and Ashoka Buildcon Ltd (ASBL) remain our preferred picks, given their strong delivery track-record, healthy balance sheets and attractive valuations

Stock Performance:

Nifty 50 have rallied 54.6% (March 25, 2020- November 20,2020) since the first nationwide lockdown was announced by Prime Minister Narendra Modi However, some road contractor companies’ stocks that have outer performed or have given more or less similar returns to benchmark index Nifty 50 in the same period.