Top Indian Road and Highway Stocks to Monitor Before the 2024 Budget

As Finance Minister Nirmala Sitharaman prepares to present the first Union Budget of Prime Minister Narendra Modi’s third term on July 23, 2024, significant developments are anticipated for the infrastructure sector, particularly road and highway construction. Increased capital expenditure allocations for the Ministry of Road Transport and Highways (MoRTH) for FY25 are expected, aiming to catalyze private sector investments under the build-operate-transfer (BOT) model.

Private investments in road construction projects in FY24 reached Rs 348 billion (bn) and are projected to nearly double in FY25. This heightened allocation will boost highway construction and address the substantial Rs 3.5 trillion (tn) debt of the National Highways Authority of India (NHAI). The government targets the construction of 12,000 to 13,000 km of national highways and awarding contracts for a similar distance in the coming years.

Stocks within this sector are poised to benefit from increased infrastructure spending, potentially appreciating over time. Here are some noteworthy companies:

1 IRB Infrastructure Developers (IRB Infra)

Company Overview:

IRB Infrastructure Developers is a leading player in India’s highway sector, renowned for being the first to execute a project on the BOT model. The company has an impressive track record, having operated and maintained the first expressway project, launched and listed the first Infrastructure Investment Trust (InvIT), and tapped into offshore bond markets.

Financials:

• Asset base of approximately Rs 800 bn in 12 states across the parent company and two InvITs.

• Significant borrowing increase by 29% over the preceding nine-month period.

Key Highlights:

• First company in India to implement the BOT model.

• Pioneer in launching and listing InvITs.

• First Indian company to access offshore bond markets.

2 HG Infra Engineering Limited (HGIEL)

Company Overview:

HGIEL is a prominent player in the Indian road infrastructure sector, primarily engaged in EPC services, maintenance of roads, bridges, flyovers, and other infrastructure contract works. The company has a selective focus on Hybrid Annuity Model (HAM) projects and is pre-qualified to bid independently for large EPC and HAM projects.

Financial Performance:

• Revenue: Rs 17 bn, up 11.2% YoY.

• Operating profit: Rs 3.3 bn, up 11.3% YoY.

• PAT: Rs 1.8 bn, up 11.4% YoY.

• Expected CAGR (FY25-FY26): Revenue growth of 14%, EBITDA growth of 14%, PAT growth of 19%.

Order Book:

• Total order book as of 31 March 2024: Rs 124 bn.

• 38% of order book from EPC road projects, 40% from HAM projects.

• Government of India projects constitute 83% of the order book.

• Revenue visibility for the next 2-3 years with an expected Rs 80 bn from highway projects in FY25.

Key Projects:

• Constructed one of India’s longest 6-lane flyovers in Kerala (12.7 km).

• Built India’s first 8-lane extra-dosed stayed bridge in 33 months.

• Constructed Bundelkhand Expressway.

• Divested a 51% stake in Unison Enviro Private Limited for Rs.2.8 bn.

• SPA with National Investment and Infrastructure Fund Ltd for sale of stakes in Chennai ORR Project and Jaora-Nayagaon Road Project.

3 Ashoka Buildcon Limited (ABL)

Company Overview:

Ashoka Buildcon Limited is an established player in the infrastructure sector, with significant contributions to road construction and maintenance. The company’s extensive project portfolio and strategic initiatives highlight its pivotal role in infrastructure development.

Financial Performance:

• Revenue: Rs 31.3 bn (up from Rs 24.7 bn a year ago).

• Net income: Rs 2.4 bn (compared to a net loss of Rs 0.4 bn last year).

• EBITDA margin has declined over the last six quarters.

• Net cash accrual has remained stagnant due to sustained moderation in profitability and increased working capital requirements.

Order Book:

• Lowest bidder (L1) in two Maharashtra state road projects worth Rs 215 bn.

• Current order book: Rs 13.8 bn, down from Rs 158 bn as of 31 March 2023 due to intense competition and lower awarding in FY24.

In Conclusion, Road and highway companies are crucial to India’s growth and development. The continuation and enhancement of infrastructure investments will undoubtedly provide a significant boost to these companies and the broader market. However, investors should exercise caution and conduct thorough research before making investment decisions. The projected increase in private sector investments, coupled with the government’s ambitious construction targets, positions these stocks for potential growth in the coming years.