Road awards were muted in Q1FY25.
But the pace will accelerate with a bidding pipeline of Rs 1.1 trillion (September 2024), mostly dominated by HAM (Hybrid Annuity Model) projects, which contribute 47 per cent and engineering procurement and construction or EPC projects, which have about 36 per cent share.
Hence, infrastructure companies mostly reported revenue decline on a year-on-year (Y-o-Y) basis in Q1FY25.
For example, KNR constructions and GR Infraprojects (GRIL) saw revenue declines of 30 per cent and 12 per cent respectively Y-o-Y.
The gains recorded in terms of operating or net profit by road companies in Q1FY25 were mostly due to exceptional gains accounted for by PNC Infratech and KNR Construction.
Adjusted for exceptional gains, operating profit margins met street expectations of about 14.5 per cent.
Execution is likely to improve sharply in H2FY25 after some pickup in Q2FY25.
Only 95 kilometres (km) of projects were awarded in Q1FY25 versus a full-year target of 5,000 kilometres.
Given the huge pipeline, order inflows could bulge in H2FY25.
Elevated input costs also kept operating profit margins under pressure.
Though steel and aluminium prices have corrected 30 per cent from record highs in April 2022, metal prices remain elevated. But cement prices have decreased 8 per cent from highs in October 2023.
The National Highways Authority of India s (NHAI) focus is on asset monetisation.
The NHAI asset monetisation cell has a target of Rs 54,000 crore in FY25. In FY24, NHAI exceeded targets by awarding four ToT (toll, operate, transfer) bundles worth Rs 15,900 crore.
For FY25, NHAI plans to offer a dozen bundles for private bids to hit higher monetisation than Rs 40,000 crore achieved in FY24.
Companies remain confident about monetisation, especially in HAM projects.
Companies with decent order backlogs, a solid financial position, and presence in multiple segments are best positioned to benefit.
During Q1FY25, the pace of road construction declined to 1,934 km from 2,250 km in Q1FY24 due to elections, extreme heat, early monsoons, and delays in declaration of the appointment date.
In FY24, the Ministry of Road Transport and Highways (MoRTH) constructed 12,349 km of national highways.
In FY23, total road construction stood at 10,331 km, reflecting 20 per cent Y-o-Y improvement.
Awarding was also subdued in FY24, with 8,581 km awarded compared to 12,000 km in FY23.
The MoRTH plans to award projects worth Rs 3 trillion from FY25 and beyond, including eight high-speed corridors worth Rs 50,000 crore.
Road companies have diversified into railways, metros, solar, power transmission, water projects, and tunnelling.
Most companies expect 25-30 per cent of revenue to eventually come from such segments.
The outlook remains positive in the long term.
Managements have guided that competitive intensity has reduced in bidding for higher-value HAM projects, while still high for EPC projects.
HG Infra Engineering (HGIEL) has an order book of Rs 15,642 crore, about three times of FY24 revenue.
It could achieve revenue growth of 16 per cent from FY24 to FY26.
HGIEL expects an order inflow of Rs 10,000-12,000 crore in FY25, with Rs 8,000 crore from roads and rest from diversified segments.
J Kumar Infra has an order book of Rs 26,320 crore, which is 5 times its FY24 revenue.
Revenue growth could be 18 per cent over FY24-FY26.
Guidance is for better operating profit margins and they are expected to rise to 15-16 per cent (FY26) from the current 14-15 per cent range.
Order book of GR Infraprojects is Rs 19,320 crore, and for FY25, it anticipates order inflow of Rs 15,000-20,000 crore across all segments, with a revenue growth of 10 per cent over FY24-FY26.
It has diversified into railways, ropeways, optical fibre, multi-modal logistic parks (MMLPs), and power transmission.
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