2 Infra Stocks To Buy That Can Give Up To 37% According To Motilal Oswal

Buy Ashoka Buildcon, says the India Strategy report of Motilal Oswal

“Awarding activity has started showing signs of an uptick as the National Highways Authority of India (NHAI) awarded 4,800km of road projects in FY21. While this was still below the previous peak of 7,397km in FY18, the awarding trajectory has rebounded from the lows of FY19. We expect the uptrend to continue over the next two years,” the brokerage has said.

Motilal Oswal expects EBITDA at Rs 1.2 billion, with EBITDA margin at 11.8%, flat sequentially.

“Watch out for commentary on execution momentum in construction activity and asset monetization. Ordering was better than expected in the Roads sector towards FY21-end, with a strong bid pipeline in place. However, funding constraints continue to impact the sector’s fundamentals, especially interest rates on HAM projects,” the brokerage has said.

Buy KNR Constructions

The brokerage has also recommended buying the stock of KNR Constructions for returns of nearly 15% from current levels, with a price target of Rs 330 on the stock.

“We expect KNR Constructions operating profit to grow by 4% YoY, in spite of higher revenue growth, due to an adverse revenue mix (lower revenue from Irrigation projects).

Net profit for our coverage universe is likely to increase by 13% YoY. The 17% YoY increase in KNR Constructions is largely attributed to lower depreciation and interest cost,” the Motilal Oswal has said.

“KNR Constructions and Ashoka Buildcon are our top stocks to buy in the sector. We like KNR Constructions owing to its net cash Balance Sheet on account of its: a) already monetized HAM projects, b) superior focus on working capital management over growth, and c) superior execution capabilities. Ashoka Buildcon’s a) improved working capital management, b) minimal net D/E, and c) ability to execute projects in a timely manner are key positives,” the brokerage has said.

Interest rates negative for players

According to Motilal Oswal, unlike the general perception, declining interest rates have turned out to be a negative for Road players. This is because they carry a negative spread on the debt of HAM projects. Notably, NHAI pays at the bank rate plus 3%, currently 7.25% on capital. However, the cost of debt is currently higher. This, along with the risk of an increase in the cost of equity (due to the COVID-led lockdown), has wiped out the valuations of HAM projects. On a positive note, returns would now be linked to the MCLR rate rather than the bank rate, thereby addressing the negative spread concern. However, this is applicable only for future projects,” the brokerage has said.

Disclaimer

The above stocks are picked from the brokerage report of Motilal Oswal Financial Services. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.