5 smaller companies that merit more attention as roads sector heats up

This is also reflected in the order book. Most of the companies in this space are sitting on an order book of close to 3-4 times their sales which gives them the highest visibility in terms of the revenue growth. Backed by strong order book, most of these companies are expected to witness 20-25 percent growth in revenues over the next two years. Companies like J Kumar Infraprojects that largely operate in markets like Mumbai are sitting on order book of close to Rs 8,200 crore which is about 5 times its FY17 revenue, and thus provide the highest visibility in the sector. With major projects largely metro construction working on schedule the company is hopeful of delivering 25-30 percent growth in sales over the next two years.  

Execution to drive growth

This is the market for companies with strong execution capabilities and prudent balancesheet management. Companies such as KNR Construction with strong execution capabilities operates with 35 days of receivables and 15 days of inventory generating strong cash, which is redeployed in the business. This is also the reason for its low debt-to-equity at 0.6 times and interest coverage of 8 times - one of the best in the industry, providing advantage to grab more projects. What is more, the company is sitting on order book of close to Rs 4,500 crore or 3 times its sales.

One other company that has taken advantage of this phenomena is the recently-listed HG Infra. Its order book has grown at 94 percent annually as in-house construction capabilities and owned equipment has helped faster execution without much pressure on the balance sheet. It operates at less than 1 times debt-to-equity. Its working capital days at about 35 is much lower than the industry average of 100 days. Moreover, with the infusion of the IPO money of about Rs 300 crore, it would be able to bid for the larger projects. The company is already sitting on order book of over Rs 4,000 crore or 4 times its FY17 revenues, providing strong visibility.

Hybrid opportunities

Of late, as against BOT (Build Operate Transfer), most of the projects have been announced in the HAM category (hybrid annuity model) where a part of the project cost is provided by the government, and the remaining is in the form of an annuity. Thus, the developer has much more leeway to scale and share the risk with the government. Among smaller companies, PNC Infratech and Sadbhav Engineering are quite active here with 12-13 percent market share each for the HAM projects awarded in FY17.

PNC, which has a strong balance sheet (less than 1 time debt-equity) is sitting on an order book of close to Rs 8,000 crore, which is almost 4 times its sales. Looking at its project pipeline and management guidance, the company is expected to grow its revenues at more than 50 percent annually over next two years. Sadbhav Engineering is a similar story with the expected revenue growth of 20-30 percent over the next two years backed by a strong order book of Rs 9,500 crore or about 3 times its sales.

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