Construction - NHAI meet takeaways; sector update :Edelweiss

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We attended the NHAI broker conference for its upcoming Bond issue. NHAI was represented by Mr. J N Singh, Member (Finance). Having bid out 5,100 kms of projects YTD already, NHAI has expressed confidence to meet the target of 7,300kms for FY12. Awards through the EPC route are set to increase from FY13. With the pace of land acquisition improving, both awards and execution are expected to inch up going ahead. We reiterate Sadbhav Engineering and IL&FS Transportation as our top picks. 

On track to meet FY12 target, awards in EPC mode set to pick up

NHAI has already bid out ~ 5100 km of projects YTD in FY12 and is on track to meet its target of 7300 km for the full year. It is planning to award 3000kms-4000kms of projects a year through the EPC route over next two years (vs negligible in the last three years).  A part of the proceeds from the bond issue will be utilized for this purpose. This is a positive for medium sized EPC companies like Sadbhav.

Pace of land acquisition gathers momentum, costs may escalate

NHAI expects to acquire 11,000+ hectares of land in FY12 as against 8,500 hectares in FY11. The target for FY13 is close to 14,000 hectares. NHAI also plans to start acquiring land for expressways from next year onwards. The cost incurred on this annually is INR70bn-75bn which might go up given the new Land Acquisition Bill. Land acquisition process has become smoother across the country in the last couple of years except in few patches (like Goa) where support from local authorities is lacking.

Execution likely to accelerate with higher project awards

NHAI expects to construct 2400 kms of highways in FY12 versus 1780 kms last year. This is more a function of the project award done 3-4 years back; with projects award inching higher, road building is expected to get a boost.

Competition to moderate as incumbents show less aggression

For the 5100kms of projects bid out so far this year, NHAI was estimating an NPV outflow of INR33bn. Instead, it will receive an inflow of INR190bn through premiums. As per NHAI, the competitive intensity should decline in future with the existing winners (such as GMR, IRB etc.) no longer bidding aggressively for new projects.

Our top picks: Sadbhav Engineering, IL&FS Transportation

We like Sadbhav for its superior execution and working capital efficiency. We like ITNL as it remains one of the best plays on peaking interest rates.  Also, both stand a good chance to bag few projects over the next 4-5 months as competition eases as they have been cautious in bidding for new projects given the aggressive bidding by peers.