Road and Highway Stocks in India to Watch Out for Ahead of the Budget

The stage is set for Finance Minister Nirmala Sitharaman to unveil the inaugural Union Budget of Prime Minister Narendra Modi's third term on 23 July 2024.

Plans to increase capital expenditure allocations for the Ministry of Road Transport and Highways (MoRTH) for FY25 are on the cards.

Road construction projects are expected to significantly increase private sector investments, particularly under the build-operate-transfer (BOT) model.

Private investments in road construction projects in FY24 reached Rs 348 billion (bn) and are projected to nearly double in FY25.

A higher allocation will help boost highway construction and address the substantial Rs 3.5 trillion (tn) debt accrued by the National Highways Authority of India (NHAI).

The government aims to construct 12,000 to 13,000 km of national highways and award contracts for a similar distance to maintain progress in highway development over the coming years.

Stocks within this sector, are likely to benefit from increased infrastructure spending and are expected to appreciate over time.

Read on...

#1 IRB Infra

IRB Infrastructure Developers is India's leading infrastructure developer in the highways sector. It was India's first company to execute a project on the Build-Operate-Transfer (BOT) Model.

The company also holds the record for operating and maintaining the first expressway project, launching and listing the first Infrastructure Investment Trust (InvIT), and is the first Indian company to tap offshore bond markets.

IRB has an asset base of approximately Rs 800 bn in 12 states across the parent company and two InvITs.

Stock in the News

In June 2024, IRB Infrastructure Developers Limited and the IRB Infrastructure Trusts' toll revenue increased by 35% year on year (YoY), reaching Rs 5.17 bn from Rs 3.83 bn in June 2023.

The strong performance in June led to robust results, with toll revenue in the first quarter of FY25 hitting Rs 15.5 bn, a 32% rise YoY.

The government's push for private participation in highways has got IRB to commit the largest share of its investments in the current financial year for adding road capacity through the BOT mode.

The company is looking to invest around Rs 100-120 bn in 2024-25 of which around Rs 80 bn will be via the BOT route, and around Rs 40 bn for acquiring operational highway assets through Toll Operate Transfer (ToT) mode.

Financials of the Company

IRB reported a 45% rise in consolidated net profit to Rs 1.8 bn for the March 2024 quarter, mainly due to higher income.

Total income surged to Rs 25 bn from Rs 16.9 in the previous year. Total expenses also rose to Rs 20.6 bn against Rs 14.5 bn a year ago.

The consolidated net profit rose to Rs 6 bn in FY24 compared to Rs 7.2 bn in FY23. The company has paid Rs 1.8 bn as dividend for FY24.

The debt to equity ratio has significantly dropped to 1.36x on the back of increasing equity & deleveraging of the balance sheet by IRB.

#2 Dilip Buildcon

Dilip Buildcon is in the business of development of infrastructure facilities on an engineering procurement and construction basis (EPC) and undertakes contracts from various government and other parties and SPVS (special purpose vehicles) promoted by the company.

DBL 2.0 Plan

The company expects an order inflow of Rs 100-120 bn in FY25. It is focused on debt reduction and aims to reduce debt by Rs 5 bn in FY25 compared to Rs 8.6 bn reduced in FY24.

The company's main focus would be to strengthen the balance sheet, become net debt-free by FY26, maintain consistent cash flow, deliver growth, and build client reach in different geographies.

Financials of the Company

The company's profit after tax (PAT) for the quarter has grown by 103.1% YoY, indicating a strong trend in the near term.

Additionally, the net sales for the quarter were the highest in the last five quarters, showing a positive trend in the near term.The company's interest cost has increased by 29% over the preceding nine-month period, indicating a rise in borrowings.

#3 HG Engineering

H.G. Infra Engineering Limited (HGIEL) is an Indian road infrastructure company engaged in the business of EPC services, maintenance of roads, bridges, flyovers, and other infrastructure contract works.

The company is majorly engaged in road construction activities through the EPC business with a selective focus on HAM projects. It is also pre-qualified to independently bid for large EPC and HAM projects.

FIIs & DIIs have increased their stake in the company in March 2024.

Healthy Order Book

HG Infra won two EPC road project orders worth Rs 41.4 bn from Maharashtra State Road Development Corporation Limited.

As of 31 March 24, the company's total order book stood at Rs 124 bn, equivalent to 2.4 times the FY24 revenue. Road EPC projects accounted for 38% of the total order book, while 40% originated from HAM road projects, and the rest comprised other projects.

A significant portion, 83%, of these projects are attributed to the government of India, with the remaining 17% coming from the private sector. This distribution provides revenue visibility for the next 2-3 years. The company expects Rs 80 bn from highway projects in FY25.

Financials of the Company

The revenue of the company stood at Rs 17 bn which grew by 11.2% YoY driven by margin expansion and lower finance costs.

However, its long-term growth has been sluggish. The operating profit of the company stood at Rs 3.3 bn which grew by 11.3% on a YoY basis, while the PAT of the company stood at Rs 1.8 bn, which increased by 11.4% on a YoY basis.

HGIEL is expected to post healthy revenue, earnings before interest tax depreciation amortisation (EBITDA), and PAT growth of 14%, and 19% compounded annual growth rate (CAGR) respectively over FY25 and FY26.

This will be driven by the company's strong order book position, better order intake, diversification into the related sectors as well as the government's thrust on developing the infrastructure.

#4 KNR Constructions

KNR Constructions Ltd provides EPC services in segments such as roads and highways, irrigation, and urban water infrastructure management.

Order Book

As of 31 March 2024, KNR's order book is positioned at Rs 53 bn of which Rs 31.9 bn came from the road sector.

Road (HAM) projects accounted for 42% of the total order book, while 27% originated from road(other) projects, and 31% from irrigation projects.

Future Expansion Plans

Given a robust order pipeline and a strategic focus on expanding into new segments and markets, KNR aims to significantly enhance its order book.

Additionally, considering the slow pace of awarding contracts by the NHAI, the company is exploring partnerships for BOT projects and diversification into non-road segments.

The tender pipeline remains robust with strong order flows expected post-elections. The company is venturing into non-road segments such as metro and water projects to increase its addressable market.

Execution is expected to flatten in FY25 with strong growth in FY26. It expects an 11% CAGR in revenue till FY26. EBITDA margin is expected to be 17-18%.

Financials of the Company

KNR's revenue was up 11.8% YoY to Rs 13.1 bn, reported EBITDA margin stood at 16.3%..

At a net level, the reported PAT stood at Rs 1.9 bn, up 54% YoY, owing to a one-off gain. The order book stood at Rs 67.4 bn.

FY24 revenues at Rs 40.9 bn were up 9.3% YoY. Margins at 14.7%, were down, owing to one-offs. PAT at Rs 3.79 bn, down 24% YoY.

The company's net debt-free status on a standalone basis and strong balance sheet will help in delivering robust growth.

#5 Ashoka Buildcon

The company is engaged in the business of construction and infrastructure facilities on EPC and BOT basis. It is also involved in the sale of RMC (ready-mix concrete).

Ashoka Buildcon Ltd (ABL) is a Fortune India 500 company and one of the leading highway developers in India. The company is an integrated EPC, BOT, and HAM player.

It is engaged in segments that are highways & bridges, power (EPC), railway works, buildings (EPC), city gas distribution, and smart infrastructure. It has been executing 41 PPP projects and has a presence in 20+ states.

Signature Projects

The company has constructed one of India's longest 6-lane flyovers in Kerala of 12.7 Km, India's first 8-lane extra-dosed stayed bridge in 33 months, and constructed Bundelkhand Expressway.

The company has divested its 51% stake in Unison Enviro Private Limited to Mahanagar Gas Limited for Rs.2.8 bn.

The company executed a SPA with National Investment and Infrastructure Fund Ltd for the sale of a 100% stake in the Chennai ORR Project and Jaora-Nayagaon Road Project for Rs 6.8 bn and Rs 6.9 bn respectively.

Order Book

ABL has been declared the lowest bidder (L1) in two Maharashtra state road projects, aggregating Rs 215 bn, taking the order book position to Rs 13.8 bn. The entire outstanding order book of ABL is executable.

The company's order book position moderated from Rs 158 bn as of 31 March 2023, due to intense competition and lower awarding in the roads sector in FY24.

Financials of the Company

Revenue was Rs 31.3 bn compared to Rs 24.7 bn a year ago. Net income was Rs 2.4 bn compared to a net loss of Rs 0.4 bn last year.

EBITDA margin of ABL has displayed a declining trajectory over the last six quarters.

Sustained moderation in profitability has resulted in net cash accrual remaining stagnant in the last four years.This, along with an increase in working capital requirement emanating from a ramp-up in operations, led to a rise in debt levels.

Its debt increased to Rs 2.4 bn as on 31 March 2024, from Rs 1.9 bn in March 2023.

Conclusion

Road and highway companies play a very important role in defining the growth and development of our country.

The continuation and enhancement of infrastructure investments will undoubtedly provide a significant boost to these companies and the broader market.

However, investors should exercise caution while considering these stocks for investment.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...