Till recently, stocks in the road construction space had enjoyed a good run on the bourses, all thanks to the healthy award of contracts by the National Highways Authority of India (NHAI), which ensured revenue visibility for many companies, at least for the next couple of years.

But over the past three months, the shares of companies such as Dilip Buildcon, Sadbhav Engineering, NCC and KNR Constructions have fallen by 22-42 per cent, faring poorly compared to the BSE Midcap (-7.3 per cent) and the BSE 500 (0.4 per cent). Other stocks in the segment have corrected by 12-20 per cent. Analysts tracking the segment have flagged concerns over execution delays, difficulties in funding tie-ups, rising interest rates and political risks.

Execution concerns

The NHAI has awarded contracts for the construction of 8,000 km of highways in FY18 and is expected to hand out deals for another 10,000 km in FY19. And though companies have consistently won orders, the key issue is execution.

Says Deepak Jasani, Head of Retail Research, HDFC Securities: “Though the companies are flooded with orders (average book-to-bill ratio is between 3-4 times), investors are worried about the pace of execution of the orders, especially due to land acquisition issues and funding tie-ups on the equity and debt components.”

bl PO09Pg1fundingcol


Binod Kumar Modi, Senior Research Analyst, Reliance Securities, concurs: “Increasing execution concerns of newly-bagged projects (especially on the hybrid annuity model), led by funding constraints, and the recent reversal in the interest-rate cycle, were prime reasons for the sharp fall in the construction stocks. These were accentuated with the rout seen in mid-caps and small-caps.” With many public sector banks (PSBs) under severe stress, loans are not readily forthcoming for highway projects. Even in the HAM (hybrid annuity model) model — where the government bears 40 per cent of the costs — tying up funds has been challenging.

“Considering that HAM road projects constitute around 45 per cent in volume terms, and over 60 per cent in value terms, of total road projects awarded in FY18, construction companies require substantial capital for equity infusion in the next couple of months for financial closures. We believe there are concerns due to the capital crisis in PSBs,” says Modi.

Jasani expands on the point: “With 11 PSU banks already under PCA (preventive corrective action) and another six likely to be included, the availability of debt for these companies could be a challenge, unless private banks take their place. Companies owning SPV (special purpose vehicle) assets are trying to encash this portion to raise funds for the equity component of new orders.”

Political risks are not to be discounted as well. “There is concern about the political outcome of the general elections and the importance that would be given to the roads sector by the new government,” Jasani adds.

NHAI’s lending hand

However, the NHAI has been trying to help out the companies, say analysts. According to Pranav Mehta, Research Analyst at Equirus Securities, “NHAI is actively engaging with lenders to allay their apprehensions regarding the funding of HAM projects. It is also working aggressively on providing the required land/right of way on time to the winners of projects.”

So, should investors start buying these stocks? Jasani strikes a note of caution: “Till there is clarity on the composition of the new government and on their policies, these stocks may bounce up a bit but are unlikely to revisit the recent highs.” However, Modi and Mehta advocate selective exposure to road construction stocks.