Improving execution may generate Street’s interest in construction stocks

ET Intelligence Group: In the past one month, the ET Construction Index has fallen 8.5% while the benchmark index Nifty 50 index has gained 1.15%. The ET Construction Index has underperformed the Nifty 50 index in the past three and six months also. So, could there be triggers which can generate investor interest in construction stocks in the coming months?

Analysts point out two fundamental triggers. One, in the third quarter of this financial year, state governments will start awarding incremental projects. This should boost construction companies’ order book. This incremental awarding will come after the National Highways Authority of India (NHAI) awarded road projects for 744 km more contracts in April-August period than 516 km on average in the corresponding period of the previous three years. Second, analysts foresee increased interest of mutual funds in select construction stocks after Sebi's directive of multi-cap schemes changing their allocation to mid-and-small–caps to at least 25% each in their portfolios.

Besides, in recent months, construction companies have shown resilience. According to various analysts’ estimates, execution has improved to 70-90% in the past three months from less than 30%. Also, labour availability has improved to 60-90%. This is quite advantageous for well-placed construction companies which have relatively light balance sheets and order books which gives revenue visibility for the next three years.
In addition, liquidity issues are also being addressed. According to an estimate of Japanese brokerage Nomura, the government’s liquidity easing measures have provided liquidity to the tune of Rs 34,600 crore to construction companies. The brokerage estimates an additional liquidity of Rs 2,500 crore to flow in the sector in the coming months.

Brokerage Philip Capital said in its report on the sector, “We believe that the infrastructure sector is at the cusp of a big upcycle. The fundamentals are strong (balance sheets, order books), execution activity is picking up and order award momentum remains strong. To top it all, stocks are currently trading at abysmally inexpensive valuations and would deliver significant returns over the next 12-18 months akin to the run-up during the 2014-15 cycle in our opinion.” Analysts prefer companies such as KNR Constructions, PNC Infratech, Dilip Buildcon and Ashoka Buildcon to their peers.