IRB Infra, NCC, KNR Constructions: Q3 results preview, target prices

In its Q3 preview on construction and material, InCred Equities said it maintained an 'underweight' rating on the sector because of a likely slowdown in project execution in FY25 and stretched stock valuations.

Over the last six months, the stock price of construction companies declined by 14 per cent on an average. NCC and KNR Constructions are trading at expensive EV/Ebitda, InCred Equities said. It noted that PNC Infratech is trading at close to its historical average and Dilip Buildcon Ltd is trading at a discount to its historical average.

"We have a 'reduce' rating on NCC and KNR, valuing their EPC business at 6x FY26F EV/Ebitda each. We also have a 'reduce' rating on IRB Infrastructure due to its rich valuation (2.3x FY25F P/BV). Strong order inflow in FY25F against our estimate is an upside risk," InCred Equities said.

InCred Equities expects a 12 per cent YoY decline in EPC sales in Q3FY25 for Dilip Buildcon (DBL), PNC Infratech & KNR Constructions together. It projected 10 per cent YoY sales growth for NCC, driven by its strong order book (highest among peers).

"For toll-based assets, we forecast 5 per cent QoQ rise in revenue. We factor in a steady EPC Ebitda margin for companies in our coverage universe, like that in Q2FY25," it said.

Target prices
For IRB Infrastructure Developers Ltd, the brokerage suggested a target price of Rs 40, saying the EPC order book to sales (OB/sales) ratio stood at 0.8 times and is a cause of concern. The stock trades at an expensive valuation of 2.3 times FY25F P/BV against 10-year median of 1.3 times.

For KNR Constructions Ltd, InCred Equities suggested a target price of Rs 222. "Over FY19-24, the average OB/sales ratio was 2.2 times and sales grew at a CAGR of 15 per cent. We forecast flat EPC sales over FY24-26F, considering the weak OB-to-sales ratio (1.2 times)," it said.

InCred suggested a target of Rs 150 on NCC Ltd. For this company, the OB to sales ratio at 2.7 times is healthy. Over FY19-24, the average OB/ sales ratio stood at 3.8 times for NCC and its sales grew at a 9 per cent CAGR. InCred Equities forecast 7 per cent EPC sales CAGR over FY24-26.