Construction: Prefer IRB Infra, NCC says Kotak Securities

Kotak Securities has come out with its construction sector review post Q3FY15. According to the research firm, IRB Infrastructure and NCC are the preferred picks from the space.

February 24, 2015 / 11:56 IST

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Construction sector review post Q3FY15 by Kotak Securities

Improvement in execution, settlement of claims for previously incurred costs coupled with reduction in interest expense has resulted in improving the performance of companies during the quarter. Companies are looking for clarity in land acquisition process and improvement in order inflows as a key to boost execution going forward. Reworking of model of road project awards via EPC and annuity mode is likely to enthuse the players shying away from BOT projects.

Working capital cycle is yet to witness an improvement as it is being impacted by higher receivables and loans and advances. Companies are witnessing delays in payments from clients especially from the private sector, resulting in higher receivable days. Funds raised through rights issue/NCDs/ stake sale in projects has resulted in reducing the interest expense sequentially, though incremental borrowings kept leverage at similar levels.

Going ahead, companies are planning to further reduce the borrowings by containing working capital requirements along with stake sale in road, power or real estate division. Further improvement in order inflows specifically in road segment may result in equity issuances by players like IRB and ITNL to meet the incremental equity requirements.

"Thus, we opine that companies having strong balance sheet should be able to tap upcoming opportunities in the order inflows. We have a positive bias for IRB Infrastructure and IL&FS Transportation networks as they are likely to benefit from upcoming road projects in BOT, EPC segment. We also like NCC and Simplex Infra as they have a diversified portfolio and are set to benefit from revival in the private sector investments also. Our preferred picks remain IRB Infrastructure (CMP Rs.246, TP Rs 300, BUY) & NCC Limited (CMP Rs 77, TP Rs 86, BUY)", says Kotak Securities research report.