Modi's Massive Spending Could Lift these Top 5 Roads and Highway Stocks

India is investing heavily in infrastructure development, and roads and highways are a vital part of it.

The government aims to elevate its road infrastructure to match that of the US within the next five years, Minister of Road Transport and Highways, Nitin Gadkari, in a recent media interaction.

As part of a comprehensive strategy, the government seeks to alleviate metro congestion, significantly reduce travel time, and minimise road accidents, he said.

In the preceding nine years, the ministry has allocated projects exceeding Rs 50 trillion (tn) and has streamlined the contract approval process by refining existing policies.

For decongesting metros, projects have been undertaken to the tune of over Rs 650 bn which include the Dwarka Expressway (Rs 90 bn), six-lane urban extension road in the National Capital (Rs 80 bn), Eastern Peripheral Expressway (Rs 120 bn), and Delhi-Meerut Expressway (Rs 80 bn).

All these developments have put the focus on road and highway companies. Here are the top five that you need to add to your watchlist.

#1 L&T

First on our list is L&T.

L&T (Larsen & Toubro) ranks among the top contractors across the world. It executes turnkey projects with innovative design engineering for key sectors of the economy.

The company has built high-speed rail, metros, road bridges, railway bridges, dams, tunnels, ports, shipyard structures, water treatment plants, transmission lines, underground cable networks, airports, data centres, and hotels, across the world.

Now, investors have always considered L&T as a proxy for India's infrastructure story.

Although the EPC business continues to hold utmost importance to the company, it has expanded its wings in the services business, which is ranked second in terms of revenue.

At the end of the September 2023, the company had the highest-ever order book of Rs 4.5 trillion (tn). The order book grew by 72% YoY, the highest-ever growth for the company driven by the ultra-mega orders.

The company's in-house design, engineering, and, importantly, fabrication capabilities for critical equipment and systems, give it a robust competitive advantage.

The company's division, L&T Construction, recently secured a contract from the Mumbai Metropolitan Region Development Authority (MMRDA) for the construction of an Underground Road tunnel project in Mumbai.

The project involves the design and construction of twin road tunnels utilising Tunnel Boring Machines (TBMs), connecting them to the existing elevated Eastern Freeway at Orange Gate and the Marine Drive Coastal Road.

It is set to be completed within 54 months and will primarily run beneath the Sardar Vallabhbhai Patel Road. The contract falls under the mega category, with a value exceeding Rs 70 bn.

L&T's revenue has grown at a CAGR of 9% in the last three years while net profit has grown at a CAGR of 3%.

However, for the September 2023 quarter, the company reported a 19.3% YoY increase in revenue primarily aided by improved execution of the large order book and accelerated progress in the Projects and manufacturing portfolio. Net profit of the company rose by 38% YoY.

The company's return ratios stand comfortable with return on equity (RoE) and return on capital employed (RoCE) at 15% and 13% respectively.

Its debt-to-equity ratio is 1.33x as of March 2023.

To know more, check out L&T's financial factsheet and latest quarterly results.

#2 IRB Infrastructure Developers

Second, on our list is IRB Infrastructure Developers.

The company has extensive experience in road and highway construction. It is also present in multiple other sectors, including real estate, airport development, and maintenance of roads.

The company owns and manages 12,000-lane km roads across ten states. It also has a 20% share in the golden quadrilateral highway.

IRB Infrastructure Developers' primary clients are the Ministry of Road Transport and Highways (MoRTH) and the National Highway Authority of India (NHAI).

It currently operates one toll-operate-transfer (TOT) project, two build-operate-transfer (BOT) projects, and four hybrid annuity model (HAM) projects.

The company stands out in its segment as it has low dependency on external subcontracting. Usually, companies like IRB subcontract orders for execution.

But IRB Infra already has a subsidiary - Modern Road Makers - which primarily focuses on EPC segments plus operation and maintenance.

As far as industry outlook is concerned, the government's continued focus on creating infrastructure and IRB Infra's ability to build its order book is expected to result in healthy revenue and profit growth.

IRB Infra's order book stands at Rs 326.7 bn.

The company is sitting on a heavy order book with some prestigious projects including the Ganga Expressway BOT (Build-Operate-Transfer) project and Samakhiyali Tollway BOT project.

IRB Infrastructure Trust, which is IRB Infra's private InvIT, recently received a letter of award from the NHAI for Rs 44.3 bn Lalitpur Lakhnadon NH44 Toll-Operate-Transfer (TOT) project.

It also recently received a Rs 16.8 bn contract from the National Highways Authority of India (NHAI) for TOT-13 comprising Gwalior-Jhansi section on NH-44 and Kota Bypass on NH 76 projects.

This project will take the company's share in the North-South connectivity to approximately 12%; its aggregate asset base to nearly Rs 770 bn with a robust market share in TOT space to around 38%, the largest by any private transport infrastructure developer in roads and highways segments in India.

IRB Infrastructure developer reported a 29.8% YoY increase in revenue for the September 2023 quarter. The company's chairman and MD said that strong toll collections helped its performance while the commencement of tolling on Hyderabad Outer Ring Road also added to the numbers. Net profit rose 12.2% YoY.

The company's debt to equity ratio has been reducing consistently. It has gone down from 2.44x in 2018 to 1.18 in FY23.

To know more about IRB Infrastructure Developers, checkout its factsheet and latest quarterly results.

#3 PNC Infratech

Third, on our list is PNC Infratech.

The company is one of the front-ending infrastructure development, construction, and management companies in the country.

It undertakes infrastructure projects, including highways, bridges, flyovers, power transmission lines and towers, airport runways, industrial area development, and other infrastructure activities.

PNC has executed 85 major infrastructure projects spread across 13 states, of which 61 are road EPC projects.

It is currently operating 5 BOT projects, comprising both toll & annuity assets. It has a total of 22 HAM projects comprising 7 operational projects, 11 projects under construction, 4 projects where company has signed concession agreements.

PNC Infratech has a strong order book. As of H1FY24, the contract under execution is over Rs 178 bn (including a contract worth Rs 441 bn not yet included in the order book) which is over 2.5 times of FY23 revenue. Road EPC projects constitute 62% of the total order book.

Recently, the company bagged a new hybrid annuity road project worth Rs 11.7 bn from Madhya Pradesh Road Development Corporation (MPRDC). The project is to be constructed in 24 months and operated for 15 years, post construction.

PNF Infratech sales has grown at a CAGR of 27% in the last five years while net profit has grown at a CAGR of 22%.

The company's ROE and ROCE stands robust at 16.6% and 15.1% respectively. The debt-to-equity ratio stands at 1.46x

To know more, check out PNC Infratech financial factsheet and its latest quarterly results.

#4 Engineers India

Fourth on the list is Engineers India.

The company is a global engineering consultancy and EPC (engineering procurement and construction) company owned by the government of India.

It offers services in various sectors but has a primary presence in the entire oil and gas value chain.

However, the company has diversified into synergic sectors like non-ferrous metallurgy, infrastructure, water and wastewater management, and fertilisers.

It serves Indian and overseas clients, including ONGC, GAIL, NMDC, and Qatar Petroleum.

The company's order book is currently worth Rs 81.8 bn, with Rs 48.5 bn under the consultancy segment and Rs 33.35 bn under the LSTK segment.

It is also bidding for projects worth Rs 300-400 bn in sectors including refinery, petrochemicals, energy, and pipeline.

The company expects to meet or exceed last year's business and targets a 10% increase in turnover and net profit for the current year. It is focusing on international markets, particularly in Africa, South America, and the Middle East.

Engineers India's return ratios stand above average with RoE at 18.5% and RoCE at 24%. The company has no debt on its books and has been a consistent dividend paymaster.

It has paid 42 dividends since 1999 (including final and interim dividends).

To know more, check out Engineers India's financial factsheet and latest quarterly results.

#5 KNR Constructions

Last on the list is KNR Constructions.

The company is engaged primarily in the construction of roads, bridges, flyovers, and irrigation projects.

It has an established market position and strong execution capability and has successfully executed more than 6,000 lane km of road projects till date.

It has a track record for execution of projects before the scheduled timeline and receipt of early completion bonuses from the relevant authorities.

KNR Construction's order book currently stands at Rs 56.7 bn with 72% from EPC road projects and HAM projects. The company is targeting an order inflow of Rs 30-40 bn for the remaining financial year.

In the last three years, the company's revenue has grown at a CAGR of 18% while net profit has grown at a CAGR of 15% on the back of execution of projects and strong order inflow.

Return ratios of the company are also healthy with RoE at 17.3% and ROCE at 23.2%.

The company's debt to equity ratio has fallen over the last few years. It currently stands at 0.2x as of March 2023.

To know more, check out KNR Constructions financial factsheet and its latest quarterly results.

Conclusion

With India on its path to becoming a US$ 5 trillion economy, infrastructure will play a major role. By boosting infrastructure, the government aims to boost many other sectors such as cement, steel, automobile, and real estate.

However, before you choose any infra or construction company to ride the infra wave, look for consistency in revenue and profit growth.

Second, look for debt in the balance sheet and how the company has been managing it. Increasing debt can be a warning sign. Infra companies have time and again come under scrutiny on concerns about their debt.

Lastly, check the future prospects of the company. A good order pipeline will translate into higher revenues, ultimately indicating good growth prospects.

Happy Investing!

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...