Infrastructure-related stocks have seen a sharp correction in the past one year. With the government's plan to boost the sector with Rs 100-lakh crore investment in the coming years (by 2024), the sector could provide a lot of investment opportunities in 2020, said Prabhudas Lilladher.
"Our interaction with industry players suggest that orders momentum should pick up in second half FY20 and sectors such as roads, irrigation, factories, building, railways, and mining should witness healthy awarding activity," the brokerage said.
The research house feels infra companies provide a good investment opportunity as 1) order book-to-sales ratio at around 3.5x provides strong revenue visibility; 2) execution is expected to garner pace; 3) most companies have a healthy balance sheet with comfortable leverage position.
Its construction universe saw stock prices correcting by around 40-50 percent over the past one year amid the ongoing liquidity crunch, muted ordering activity (in first half of FY20/FY19) and contraction in multiples of midcaps.
Its Z-scores suggest that the infrastructure companies are trading much below their 5-year average multiple both in terms of PE and EV/EBITDA.
Some of the companies are trading even below 2 standard deviations to their average PE levels making it a very attractive play, it said, adding most companies are trading at attractive valuations (average PE of 4-5xFY21E versus average of 15x over past 5 years) and offer good upside.
Prabhudas Lilladher prefers companies with low debt, good corporate governance, lean working capital cycle and 2-3 years of revenue visibility (order book).
Hence, the brokerage initiated coverage on 11 infra stocks (with accumulate call on one stock and buy on other 10 stocks) with KNR Construction, HG Infra and PNC Infratech as its top picks.
Ashoka Buildcon, Capacite Infra, HG Infra, IRB Infrastructure, ITD Cementation, J Kumar Infraprojects, KNR Constructions, NCC, PNC Infratech and Sadbhav Engineering are 10 stocks on its buy list.
Meanwhile, the brokerage advised accumulating Ahluwalia Contracts.
Z-score is a numerical measurement used in statistics of a value's relationship to the mean (average) of a group of values, measured in terms of standard deviations from the mean.
A Negative Z-score indicates stock currently trading at a discount to its historical average while a positive Z-score indicate the stock is trading at higher valuation vis-à-vis own history.
"Some of the companies such as Ashoka Buildcon, IRB Infra, ITD Cementation and Sadbhav Engineering are trading at a steep discount of around (1.8) standard deviation to their average PE levels," said the brokerage.
Even considering EV/EBITDA multiples, Z-score suggests a similar result with most of the infrastructure companies trading at a significant discount, suggesting a good entry point from investment point of view, it added.
With government's thrust on infrastructure spending (target of Rs 100 lakh crore versus around Rs 15 lakh crore over FY15-19), the brokerage expects strong growth for roads, railways, buildings, urban infra, power transmission & distribution (T&D) and water segments.
Over the last few years, infra companies havee witnessed a healthy ordering activity across various higher margin segments such as roads, railways, power T&D, buildings, industrials, urban infrastructure such as Trans-harbour link projects, metro projects and water segments, which could lead to margin expansion by 100-150bps, said Prabhudas Lilladher.
Consequently book-to-sales ratio have improved from 2.5-3x (average over FY13-19) to around 3.5x, providing strong revenue visibility over the next 2-3 years, it added.
The brokerage expects strong revenue growth, improvement in margins and lower tax rate will help PAT CAGR to be at 18 percent over FY19-22.
The brokerage said after facing balance sheet deterioration in the last downturn (over FY08-14), most companies have turned cautious and focused to their core strength - pure-play EPC.
Further, factors such as healthy mix of private and government contracts, well-defined selection of projects and efficient project management with focus on cash conversion cycle have improved the working capital cycle leading to leaner balance sheets, it added.
Despite healthy revenue growth of 20 percent over FY13-19, most companies witnessed an improvement in working capital cycle to 90-120 days from 180-220 days.
"The debt-to-equity ratio stands comfortable, at an average of 0.4x in FY19 versus 0.9x in FY15. In our view, most companies would witness 100-150bps
improvement in return ratios led by strong PAT growth, well-managed balance sheet, comfortable working capital and healthy fixed-asset turnover," Prabhudas Lilladher said.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
