Moneycontrol
Feb 13, 2018 02:53 PM IST | Source: Moneycontrol.com

Road sector outlook: Companies seem set on promising growth path

The situation on ground is improving with companies indicating an improvement in traffic in Q3 FY18.

Jitendra Kumar Gupta @jitendra1929
Representative image
Representative image

During the September 2017 quarter, road construction companies, particularly those that have BOT assets, were crying foul about the impact of GST hitting traffic growth as well as delaying decision making related to awarding of new projects.

Construction activity was low as vendors were adjusting their operation after the implementation of GST. This not only hit the growth, but also increased their working capital needs.

Nevertheless, the situation on ground is improving with companies indicating an improvement in traffic in Q3 FY18. Reflecting the same, adjusting for the impact of demonetisation last year, two leading players in this space -- IRB Infrastructure and Ashoka Buildcon -- reported 18-20 percent growth in toll revenues, which is a good indication of growth in traffic.

Secondly, construction activities too have picked up as most companies have reported better revenues from the construction division. Companies like Gayatri Projects, which is a pure construction play, reported 74 percent increase in revenues. The company has shifted its focus on construction and bagged a good amount of orders in the last year. Higher revenues also helped company report a massive 228 percent jump in net profit to Rs 46.5 crore.

Strong visibility

Within infrastructure, road construction is the fastest growing segment because of the increased pace in awarding of new projects. In November last year, close to 1170 km of road projects were awarded, which increased to 2697 km in January and is expected to move up further as the financial year draws to a close.

Companies like IRB Infra and Ashoka Buildcon are sitting on order books of Rs 7,400 crore and Rs 5,900 crore, respectively, which is close to twice their revenue. This provides good revenue visibility as far as FY19 is concerned.

Stocks to pick

Amongst stocks, we are positive on companies like IRB Infra and Dilip Buildcon, largely because of strength of balance sheet, strong position in the industry and positive cash flows. Also, recent correction in share price makes these stocks relatively better-placed in terms of valuations. For instance, IRB Infra is currently trading at 8.56 times its FY19 estimated earnings, offering a dividend yield of close to 2.2 percent.
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