Stocks to buy: PNC Infratech, NCC among top infrastructure stock picks by Phillip Capital

The infrastructure companies in India reported decent financial performance in the quarter ended September 2023, broadly in line with street expectations. The order execution was decent despite the impact of prolonged monsoons in parts of India as many companies reported strong year-on-year (YoY) growth in topline.

The topline of infrastructure companies grew at 21% YoY, while the majority of the companies reported marginal decline in EBITDA on a sequential basis.

“India is executing one of the biggest road development programmes in the world along with investment in rail, water and irrigation. The growth in innovative infrastructure financing through InvIT will unlock potential for the sector including transmission, airports, data centre, warehousing, metros & railways, power etc,” Phillip Capital said in a report.

The brokerage firm believes the fundamentals are strong (balance sheets), execution activity is picking up and order award momentum is expected to get strong. Margins have stabilised and to pick up further going forward, on the back of pass-through clauses and new projects being won at higher input costs. 

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“We believe the sector should be looked as stock specific now considering runup in some stocks as well as growth concern in some stocks due to book to bill below 2.2x. We maintain PNC Infratech as our top pick, followed by HG Infra Engineering and NCC. We see limited upside potential in GR Infraprojects, KNR Constructions and Ahluwalia Contracts (India),” Phillip Capital said.

Here are top infrastructure stocks to buy:

PNC Infratech | Buy | TP: ₹470

PNC Infratech delivered a decent Q2 performance as its topline grew by 8% YoY with marginal weakness in execution. Orderbook is decent at 2.4x book-to-sales, while balance sheet got stretched a bit with net debt position of ₹2.6 billion, slightly neutralised by improved working capital. 

“However, the balance sheet is strong enough to fund the HAM equity requirement. The management is hopeful of order inflow of c. ₹100 billion in FY24 and diversification should support growth going ahead and maintain 15% growth revenue guidance for FY24. Overall, PNC continues to smartly track the EPC evolution curve, diversifying its orderbook – water, canal & railway projects now forming 37% of the orderbook,” Phillip Capital said.

The brokerage has a ‘Buy’ rating on the stock with a price target of ₹470 per share, implying an upside of 44% from Tuesday's closing price.

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HG Infra Engineering | Buy | TP: ₹1,140

HG Infra Engineering delivered muted performance in Q2FY24 impacted by prolonged monsoons. Margins were down by 14 bps YoY at 15.9% but ahead of estimates of 15.3%. The orderbook at ₹106.8 billion – appears decent at 2.3x book-to-sales.

“While we remain impressed by the HG Infra story, with its strong fundamentals (strong balance sheet, cash generating business and stable margin profile), we are slightly concerned about its medium-term growth potential, given its muted orderbook,” said the brokerage.

It tweaked earnings estimates for FY24/FY25 (-5%/-7%) on lower guidance by the management. It continues to value EPC business at 11x FY25 PE on strong fundamentals and existing HAM projects at 0.7x P/BV.

The brokerage maintained a ‘Buy’ call on the stock considering attractive valuation at 9.6x FY25PE, but cut the target price target to ₹1,140 per share from ₹1,220 earlier, expecting an upside of 28% from Tuesday's closing.

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NCC | Buy | TP: ₹185

NCC delivered strong Q2 results with robust execution. Overall, a strong performance, paving way for record topline and PAT in FY24. 

“We remain positive on the NCC story, of strong earnings growth, driven by its strong balance sheet, diversified orderbook and presence across segments. We slightly upgrade our estimates for FY24/FY25 estimates (+3%/+0%) on a strong outlook. We continue to value EPC business at 12x FY25PE on back high revenue visibility resulting from a robust orderbook,” Phillip Capital said.

It maintained a ‘Buy’ rating on the stock with a target price of ₹185 per share.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.