Which infrastructure stocks should we focus on ahead of the budget?
The Modi government will announce its last full budget before the 2024 general elections. The path toward boosting the manufacturing sector outlined in the last budget is likely to continue in the upcoming budget. Therefore, the central government’s priority remains to foster the nascent investment cycle through a continued increase in public capital outlays and infrastructural spending. Therefore, capital goods and infrastructure will be in focus. We at Swastika Investmart have two quality infrastructure stocks on our radar ahead of budget.
KNR Construction and PNC Infrastructure remain institutional favorites for a long period. And they have delivered a good return even in a tough time for the industry. PNC Infratech and KNR Construction remain two of our preferred picks in the EPC space given their robust order books, healthy return ratios, and lean balance sheets. The road sector is gaining significant traction on account of the central government’s proactive push for infrastructure development, and incumbents like KNR Construction and PNC Infra are likely to be the key beneficiaries of the structural growth opportunities available in the sector with a robust order book and better execution process.
Road, highway, bridge, and flyover building on an EPC, BOT, and Hybrid Annuity Model (HAM) basis are among the services provided by the KNR. Additionally, it works on irrigation projects, agriculture projects, and managing urban water infrastructure. Some of the customers of the Co include the National Highways Authority of India (NHAI), Ministry of Road Transport & Highways (MoRTH), Government of Telangana, Karnataka State Highway Improvement Project (KSHIP), Madhya Pradesh Road Development Corporation Ltd (MPRDCL), etc. As per our research analysis as of September 30, KNR had an order book of Rs 8,042 crore, implying a revenue visibility of more than 2–3 years. In FY23 and FY24, management expects EBITDA margins to be in the 18–19% range. Over the years, KNR Construction and PNC Infra have emerged as two of the leading EPC (engineering, procurement, and construction) players in the road sector.
PNC Infratech Limited provides infrastructure implementation solutions that include engineering, procurement, and construction (“EPC”) services on a fixed-sum turnkey basis as well as on an item rate basis. It also executes and implements projects on a “Design-Build- Finance-Operate-Transfer” (“DBFOT”), Operate-Maintain-Transfer (“OMT”) , Hybrid Annuity Mode (HAM), and other PPP formats. In the case of BOT and HAM, the company bid as a sponsor either alone or in a joint venture with other ventures and once the project is awarded then it is executed by incorporating a special-purpose vehicle. PNC Infratech has established itself as a capable executor in the segments of airport runways, water infrastructure, and roadways. Additionally, PNC is able to complete projects on schedule thanks to its strong execution ability, ownership of contemporary equipment, and internal teams. PNC’s order book at the end of Q2 FY23 was at Rs 19,261 crore. The company provides services to clients like NHAI, HSRDC, AAI, MSRDC, Rites, UPPCL, etc.
If we talk about valuations, then there is comfort in PNC Infratech, which is trading at a PE of 10, which is below its five-year average, while KNR is trading at a PE of 19, which is above its five-year average. Know more about the trading opportunity available to you. We are likely to see a rally in this sector as the infrastructure sector did not participate in the ongoing rally in domestic economy-facing stocks despite the sector’s positive outlook.