Strong capex by Power Grid Corporation of India, state electricity boards and railways will continue to drive power growth in transmission and distribution
Narnolia Financial Advisors
India continues to offer strong opportunities in the infrastructure space. Robust ordering in the last quarter of FY18 had improved revenue growth visibility across the roads and highway sector. Still, the sector has seen underperformance over the last six months.
In the current calendar year till date, Nifty Infra index is down 11.5 percent as against Nifty, which is up 9.6 percent. The National Highways Authority of India is currently focused more on land acquisitions than new tendering and hence project execution is expected to pick-up from the second half of the current fiscal.
After demonetisation and implementation of the Goods & Services Tax, the industry was just training itself and the whole chain of suppliers to fight documentation-related issues. Since then there have been four major challenges that gripped overall performance of the industry.
First, slow execution. Land acquisition for most projects are still not complete, which restricts further project execution. Even if the order book for most companies is up 20-40 percent on a year-on-year basis, the transformation into sales is expected to be muted.
PNC Infratech in a recent latest conference call suggested that it will revise its revenue guidance of Rs 2,700 crore once it receives the appointment date for hybrid annuity model (HAM) projects. Revenue for KNR Constructions may see a 10-15 percent dip in FY19 as HAM projects will be delayed due to land acquisition issues.
Second, SME suppliers are demanding credit support due to tightened liquidity and this has caused higher working capital requirements. KEC International in its recent concall said there has been higher interest expense on increase in rupee debt as buyer’s credit is not being extended/rolled over for imported raw materials.
Third, rising interest cost in the backdrop of a depreciating dollar-rupee has been a big worry for most debt-laden infrastructure players and also companies that have foreign currency denominated debt.
Fourth, rising commodity prices have put margins under threat.
Strong capex by Power Grid Corporation of India, state electricity boards and railways will continue to drive power growth in transmission and distribution. Companies with a healthy balance sheet and strong execution capabilities will scale up going forward.
Though we expect execution to pick-up by 3QFY19-end, the country’s macro environment has a large role to play in industry’s outperformance. Sub-par Q2 earnings expectation going forward implies 1-2 more months of underperformance by the sector, but this should be used to accumulate quality companies as the sector will deliver strong performance towards FY19-end.Larsen & Toubro has maintained its FY19 revenue, order inflow and margin guidance of 12-14 percent, 25 bps, and 10-12 percent growth, respectively. The management’s conscious decision of exiting non-core business and improving return ratios over the next 3 years makes it a strong investment bet.