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--Thematic Report
Infra Sector: Roads and Highways show the way
The Infra sector, as a whole, has not yet significantly recovered from the sluggishness that has prevailed since the last few years. However, certain sectors like roads and urban infra have witnessed substantial pickup off late. Not only has the Ministry set aggressive development targets for Roads and Highways, it has also extended strong budgetary allocations to that effect. Improvement on the ground is also visible with the sharp rise in the awarding of road contracts during the recent quarters. The introduction of the highly innovative Hybrid Annuity business model and prudent policy measures in the Roads sector have played a pivotal role in boosting private participation.
Select sectors to witness strong investments in coming years
We believe the improving fiscal situation would lend more flexibility towards improving infra investments. While the central budget has allocated higher funds to select infra sectors, major states have cut down capex owing their specific funding constraints. As the overall infra sector takes time to pick up, we believe sub-sectors like Roads and Highways are likely to witness strong investments. Given the pipeline of investments, we see a strong opportunity for most players across select verticals like Roads and Highways. While we are positive on asset light EPC focused companies in this space, we continue to remain cautious when it comes to asset-heavy companies, owing to their stressed balance sheets and challenging business models.
Cherry picking among players: Who is the best-placed to cash in?
There are several companies engaged directly or indirectly in infra space. We have divided them into two sub categories:
a) Players focused on the EPC segment; and
b) Players focused on BOT segment (development and maintenance).
EPC players typically have an asset-light business model and are immune to concerns pertaining to traffic and toll growth (in case of Roads), whereas BOT players recover their returns from toll, which makes the risk element more pronounced. BOT players have struggled during the past two years, owing to modest traffic and toll rate hikes. Thus, we believe EPC focused players would be better bets compared to developers. Even as few big players continue to struggle because of high leverage and some company-specific issues, mid-sized EPC players are set to benefit significantly. We remain bullish on selected EPC players with strong earnings visibility.
Rating Summary
Company
CMP
Target
Rating
ITD Cementation
142
151
ACCUMULATE
PNC Infratech
122
145
BUY
KNR Constructions
763
802
ACCUMULATE
Simplex Infra
338
391
BUY
NCC Ltd
85
88
REDUCE
Ashoka Buildcon
175
-
NOT RATED
MBL Infra
103
-
NOT RATED
Jkumar Infra
187
-
NOT RATED
Source: IIFL Research
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