NCC, IRB Infra, KNR, PNC, Dilip Buildcon shares: What InCred says ahead of Q4 results, elections

InCred Equities in its latest sectoral note on construction sector said it has 'underweight' rating on the sector, citing a likely slowdown in awarding of new projects and stretched stock valuations.

The domestic brokerage cited concerns over a dip in order inflow in the next six months and said project execution in the years of general elections fell by an average 5 per cent YoY in four prior instances. This was independent of whether there was a change in the government or not.

"The next general elections are scheduled in May 2024. We expect a strong execution in FY24F, followed by a dip in growth in FY25F," it said.

It expects an 8 per cent YoY decline but a 7 per cent sequential rise in EPC sales for Dilip Buildcon Ltd (DBL), PNC Infratech Ltd and KNR Constructions in the March quarter. It sees a 15 per cent YoY sales growth for NCC Ltd, 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 the companies in our coverage universe, similar to that in 3QFY24," it said.

Stocks to watch

InCred said NCC and PNC Infratech are trading at a premium to their six-year median EV/EBITDA while Dilip Buildcon (DBL & KNR Constructions trade close to their median levels. "However, we feel KNR Constructions’ valuation is rich (8.4x FY25F). We have a REDUCE rating on NCC, KNR Constructions, and PNC Infratech, valuing their EPC business at 6 times/ 6 times/ 6.5 times FY26F EV/EBITDA, respectively. We also have a REDUCE rating on IRB Infrastructure due to its rich valuation (2.7x P/BV FY24F). Strong order inflow in 1HFY25F versus our estimate is the upside risk to our REDUCE ratings," it said.

InCred said EPC sales and Ebitda for the companies under its coverage grew 23 per cent each in the December quarter.

“The average order book or OB-to-sales ratio was at 2.2 times (vs 2.8 times in Mar 2023). Order inflow (Rs 27,600 crore) in 9MFY24 was lower than the run-rate in FY23 (Rs 53,100 crore). Order inflow in 9MFY24 accounted for 25 per cent of the order book. We factor in a 6 per cent average EPC sales CAGR (FY24F-26F) vs 8 per cent (FY19-24F). When compared to the Mar 2023 OB-to-sales ratio, the latest number is lower for all companies in our coverage universe,” InCred said.