Budget 2023: Higher road capex puts EPC companies in spotlight

“The two sectors that stand out in terms of allocation are railways (up 51 percent) and roads (up 25 percent),” noted ICICI Securities.

For FY24, the budget allocation for roads was increased by 25 percent to Rs 2.59 lakh crore, after a 16 percent rise in FY23.

ICICI Securities said the increase in road capex is positive for engineering, procurement and construction (EPC) companies in the road segment because orders will get a boost.

Priyankar Biswas of Nomura pointed out that the overall road capex increase is largely led by the non-National Highways Authority of India segment, which has about 50 percent higher budget allocation. NHAI allocation is up by about 14 percent to Rs 1.62 lakh crore compared with 16.5 percent growth in FY23.

He explained NHAI tenders are the key drivers for road EPC companies, which is why the budgetary increase for NHAI matters.

NHAI’s mounting debt had created some nervousness for the sector. Its debt increased to Rs 3.5 lakh crore in FY22 from Rs 24,200 crore in FY15.

However, Credit Suisse said in a post-budget note that NHAI’s dependence on borrowing has stopped and its funding has moved to budgetary support from FY23.

Here are some stocks that could be a good play on the higher road capex:

• PNC Infratech

The brokerage said the company has set Rs 8,000-10,000 crore order intake for FY23 and FY24, which it believes is achievable, considering the expected pick-up in project tendering activities for the remainder of the financial year and the government’s focus on highways for FY24. It added that the standalone balance sheet remains net cash positive, while consolidated net debt is comfortable.

PNC Infratech’s order book stands at over Rs 19,000 crore, which provides healthy revenue visibility over the next two years, according to analysts.

The scrip has a buoyant technical setup.

“The stock has resumed its uptrend after retracing from Rs 380 level and is taking support at 100-week MA (moving average). So long as the stock sustains above Rs 280 level, there is a strong possibility of it inching higher and testing Rs 380-400 level over the coming week,” said Milan Vaishnav, founder of Gemstone Equity Research and ChartWizard FZE.

• KNR Constructions

Motilal Oswal Financial Services said the execution of existing contracts and a robust tender pipeline from NHAI would be KNR Constructions’ key revenue drivers over the next three years.

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A majority of the company’s clients are government agencies, including the Central government, NHAI, and the public works departments of state governments. A higher capex allocation for the sector is seen as a positive.

“The stock marked a top just above 340 and a subsequent lower top near 320 levels. Since then it has been under a corrective trend. Currently, the stock is seen resisting the 100- and 50-week MA that stand at 260 and 254. respectively,” said Vaishnav.

The stock has strong resistance between 255-280 levels and a meaningful uptrend can be expected only above this zone, he added.

• GR Infraprojects

“Though it has not bagged any major orders in FY23, its tender pipeline remains robust. It is targeting order inflows of Rs 15,000 crore in the rest of FY23,” it added.

More than 90 percent of GR Infraprojects’ order book consists of road and highway projects, analysts said. According to the company’s investor presentation, 92 percent of its orders are specifically from NHAI.

“After marking a high above Rs 2,200 in October 2021, the stock has largely remained in a corrective downward sloping trajectory throughout 2022. Presently, it remains in a neutral symmetrical triangle pattern with the zone of Rs 1,070-1,100 as strong support area. The stock will see some upside momentum if it is able to move above Rs 1,250; unless this level is taken out convincingly, no meaningful uptrend is expected,” said Vaishnav.

• HG Infra

As of September end, HG Infra’s order book was at Rs 10,851.6 crore, which is 2.9 times book to trailing 12-month revenues, ICICI Securities said in a report.

“Overall, the company has guided for order inflows of around Rs 9,000-10,000 crore during FY23, to be driven by a strong order pipeline in roads segment and growing opportunities in the other infrastructure verticals such as railways, and water supply,” the domestic brokerage firm said.

It added that the company’s balance sheet has remained lean over the years, backed by a prudent strategy to focus on an asset-light business model and efficiently manage working capital.

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The stock marked its high in the 800-825 zone and is seen consolidating in a sideways trajectory after a corrective retracement.

“Presently it stays in a trading range with the 100-week MA acting as strong support near 550. The stock is expected to see upside momentum if it is able to move past 680 levels convincingly,” said Vaishnav.

The company will detail its quarterly earnings on February 8.

• Ashoka Buildcon

Ashoka Buildcon’s main focus is on national and state highway projects. But it is well-diversified, with roads contributing 55 percent of the order backlog, transmission and distribution forming 15 percent, railways 10 percent, and buildings constituting slightly above 19 percent of the order backlog, the brokerage firm said.

The stock appears weak from a technical perspective.

“It is currently trading below all the key weekly moving averages. 100- and 200-week MA are at Rs 90.55 and Rs 90.70, respectively, and pose a strong resistance to the stock,” said Vaishnav.

Unless these levels are taken out, no sustainable uptrend is likely in this stock, he added. The stock draws support from Rs 68 level.