During the year, the infrastructure sector performed well despite the lockdown. Agencies like NHAI alone awarded around 1,300 kms of projects during H1 FY21, which is 60 percent more than same period last year. Heavy awarding was also witnessed in Water and Irrigation segment during the quarter. The robust project awarding the different agencies has bloated the order books of several contractors. Some of the companies have already achieved their full year order inflow targets and are now comfortably placed.
Other than awarding, the government has also ensured sufficient liquidity in the hands of contractors, especially during COVID times. During FY21, NHAI paid more than Rs 15,000 crore to vendors and released significant retention money due. Payments are being cleared monthly as against milestone basis. NHAI is also fast tracking the pending arbitration claims and is also significantly working on out of court settlement with the contractors.
Model Concession Agreement (MCA) clauses in BOT-toll projects have also been changed and are more concessionaire friendly now. Execution has drastically picked-up on QoQ basis with labour availability improving every month and easing of lockdowns. Easing supply chain also helped in ramping up execution.
The stock performance has been improving post the correction seen in March/April. The better-than-expected pickup in execution and improved labour availability has drastically enhanced the outlook. Most companies have increased the full year revenue targets post September quarter results.
2021 outlook looks bright with improving execution, comfortable balance sheet and strong order pipeline
Most contractors are sitting on order book of 3-3.5x of last 12 months revenues which provides very strong revenue visibility for them. As labor availability (80-90 percent currently) improves further, the execution is set to pick up. The bid pipeline of projects is very strong despite the large number of projects already awarded by the Government in some segments. NHAI is targeting to end the year with orders of 4500 kms (1300 kms in H1) which would mean significant opportunity for contractors just from the Road segment.
The contractors over the last couple of years have focused on balance sheet improvement. Many of them have sold their BOT assets and are constantly looking to sell more assets to remain asset light. This has now placed them in comfortable position to take up more orders and execute.
Our top picks in this space are PNC Infratech, KNR Constructions and HG Infra. We believe their strong order books, focus on balance sheet improvement and strong execution capabilities would lead to strong growth.