Brokerages upbeat on EPC stocks post budget
For FY22, the Centre has budgeted for a 26% increase in capital spending
Mumbai: The increases in budgetary allocations for the infrastructure sector, including roads, railways, water supply programmes and healthcare, bodes well for engineering-procurement-construction (EPC) companies operating in these segments. Faster payments settlements from central agencies such as the national highways developer, improvement in project execution rates and a now-reliant inflow of government projects have also led to a re-rating of equity of many listed infra players.
For FY22, the central government has budgeted for a 26% increase in capital spending, hoping that its multiplier effect and resulting job creation will bring the gross domestic product (GDP) close to its projected 11% growth rate next fiscal year.
The spending push includes an allocation of ₹2.15 trillion for the Indian Railways, up 33% over the revised estimates for FY21. The spending will be directed at critical maintenance projects, making the rail network’s freight business more competitive and completing the ongoing dedicated freight corridor projects ahead of their commissioning deadlines in June 2022.
Besides, the roads sector was allocated ₹1.08 trillion for the construction of 11,000 km of roadways.
The central government has also budgeted to provide ₹2.87 trillion to Jal Jeevan Mission, the urban water supply programme, for FY22-26 and another ₹1.41 trillion for solid waste management. With covid-19 revealing the faultlines in India’s healthcare systems, the Centre also allocated around ₹2.23 trillion to improve physical healthcare infrastructure for FY22, a 137% increase in budget allocations year-on-year, according to a 15 February report by credit ratings agency India Ratings and Research.
In the last few weeks, several infra companies have seen earnings upgrades and revised price targets from brokerages on the back of strong Q3 results and the expected boost from the union budget. Most construction firms have a significantly higher number of buy ratings from brokerages compared to sell ratings.
The opportunity for the infrastructure sector is good enough for large players to be selective about the projects they take on, Alok Deora, vice-president, YES Securities, told Mint. “The current order inflows of the main listed EPC players is at 3-3.5 times their trailing 12-month revenue; that’s comfortably high. Most of these companies have already met their order book targets for the year, so anything additional in the last two months of this fiscal will be over and above that. EPC firms will be able to report positive earnings all the way through FY22 and FY23, and the government’s focus on infrastructure spending in the budget boosts this sentiment further, hence the many stock upgrades," he added.
In fact, project ordering activity gained traction in the December quarter as the government’s focus shifted from containing the pandemic to reviving economic activity. New project spending announced in the December quarter rose by 10.29% from the preceding three months, driven by central government spending, according to data from Projects Today, which monitors the activity.
However, concerns remain. Deora said the sudden 54% year-on-year rise in steel prices may slow down project execution in the short-term. “These input costs are not a 100% pass-through for EPC contractors, so there might be a short-term effect on execution," he added.
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