The top line of infrastructure companies grew by 21% YoY, while most of the companies reported a marginal decline in EBITDA on a sequential basis.
“India is implementing one of the largest road development programs in the world along with investment in rail, water and irrigation. The growth of innovative infrastructure financing through InvIT will unlock potential for the sector including transmission, airports, data center, warehousing, metros and railways, power etc,” Phillip Capital said in a report.
The brokerage firm believes that the fundamentals are strong (balance sheets), the execution activity is increasing and the moment of the order premium is expected to strengthen. Margins have stabilized and will increase going forward, on the back of pass-through clauses and new projects won at higher input costs.
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“We believe the sector should be viewed as a specific stock now given the upside in some stocks as well as growth in some stocks on a book-to-bill basis below 2.2x. We maintain PNC Infratech as our top pick, followed by HG Infra Engineering and NCC. We see limited additional potential in GR Infraprojects, KNR Constructions and Ahluwalia Contracts (India),” Phillip Capital said.
Here are the best infrastructure stocks to buy:
PNC Infratech | Buy | TP: ₹470
PNC Infratech delivered a decent Q2 performance as its top line grew 8% YoY with marginal weakness in execution. Order book is decent at 2.4x book-to-sales, while balance sheet has tightened slightly with a net debt position of ₹2.6 billion, slightly neutralized by improved working capital.
“However, the balance sheet is strong enough to fund HAM’s equity demand. Management is hoping for an order inflow of approx. ₹100 billion in FY24 and diversification should support growth going forward and maintain 15% growth revenue guidance for FY24. Overall, PNC continues to deftly track the EPC development curve, diversifying its order book – water, canal and rail projects now form 37% of the order book,” Phillip Capital said.
The brokerage has a ‘Buy’ rating on the stock with a price target of ₹470 per share, which implies an increase 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 affected by prolonged monsoons. Margins were down 14 bps YoY at 15.9% but ahead of estimates of 15.3%. The order book at ₹106.8 billion – seems decent at 2.3x book-to-sales.
“While we remain impressed by HG Infra’s track record, 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 order book,” the brokerage said. .
It adjusted earnings estimates for FY24/FY25 (-5%/-7%) based on lower guidance from 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 given an attractive valuation at 9.6x FY25PE, but cut the target price target to ₹1,140 per share of ₹1,220 earlier, expecting a 28% increase from Tuesday’s close.
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NCC | Buy | TP: ₹185
NCC delivered strong Q2 results with robust execution. Overall, strong performance, paving way for record top line and PAT in FY24.
“We remain positive on NCC’s track record of strong revenue growth driven by its strong balance sheet, diversified order book and presence across segments. We are slightly upgrading our FY24/FY25 estimates (+3%/+0%) based on strong outlook. We continue to value EPC business at 12x FY25PE due to high earnings visibility resulting from robust order book,” Phillip Capital said.
It maintained a ‘Buy’ rating on the stock with a target price of ₹185 per share.
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Updated: 22 Nov 2023, 12:48 IST