INSUBCONTINENT EXCLUSIVE:
ET Intelligence Group: Despite considerable order books that point to high visibility of revenues in the next 3-4 years, road and
construction company stocks have fallen in the range of 10-50 per cent in the year.
The reason is that the Street has been gauging the
growth of key construction and roads companies in the last two years and their ability to deleverage their balance sheets in the past three
years suggests a less gloomy picture.
A few construction and roads companies are placed well in terms of execution of order book and
deleveraging of balance sheet
These companies are KNR Constructions, PNC Infratech, Dilip Buildcon, and NCC.
A common thread which runs through the financial performance
of these companies is the linear growth in their revenues for the past eight quarters ending September.
Bloomberg data showed these
companies have had steady revenue growth year-on-year basis in the past eight quarters suggesting increasing execution of their order
books.
Various estimates suggest these companies have an order book to bill ratio close to 4, indicating high visibility of revenues for at
least the next three years
Interestingly, as these companies have been able to reduce debt, they would be in a better position than their peers to secure new
government projects.
On the valuation front, these companies are trading at an enterprise value (EV)/operating profit (EBITDA) range of 3-7;
a 20-30 per cent discount to their past three-year EV/EBITDA.
A key factor investors need to bear in mind is that these companies may get
re-rated given their relatively high execution of their order book, reasonably good valuation and their ability to bid for new projects due
to relatively less stressed balance sheet.
