1277809 SIP myths you must know!

This year, before the general elections, the government intends to boost the construction of highways across the country. As per Road Minister Nitin Gadkari, a target of constructing 40 km of road everyday has been set for the authorities. However, currently, only 34 km of road construction is being achieved everyday.

Has the government been able to meet its highway construction targets in the last 2-3 years? During the first 9 months of FY24 i.e. till December 2023, how much of the highway construction has the government been able to meet? What are the valuations of companies associated with this sector looking like? How can you make a strong investment strategy for these shares before elections?

In July 2023, the government had increased the highway construction target for FY24 from 12,500 kms to 13,814 kms. The decision to raise targets was taken in light of road construction catching momentum in May and June, 2023. Out of the total 13,814 kms, NHAI and Ministry of Road Transport and Highways was entrusted with construction of 6,000 kms each. The remaining 1,500-2,000 kms were to be constructed by National Highways & Infrastructure Development Corporation.

The reason behind these increased targets was to encourage road construction in Odisha, Tamil Nadu, Karnataka, Maharashtra and Madhya Pradesh. Due to land acquisition and payment-related issues, some highway projects in these states were on hold last year. Data from Ministry of Road Transport and Highways notes that in the first quarter of FY24, the pace of road construction jumped by 9.4%. Between April and June 2023, around 2,150 kms of roads were constructed. About 1,966 kms of road were constructed during the same period last year.

Apart from expectations of the Road Ministry, analysts believe that in FY24, the pace of road construction will be slower as compared to last year. As per ICRA research, in FY24, around 9,000 kms worth of projects have been allocated. This is 25% less than the 12,000 kms of allocations made in FY23.

Before the 2019 general elections, only about 5,500 kms of road projects had been allocated, which was far less than 17,000 kms allocated in 2018. In FY23, the government managed to construct about 10,993 kms of national highways, falling short of its target of 12,500 kms.

In FY21, despite challenges presented by the pandemic, the government achieved construction of 13,327 kms of highways, which is the highest till date. However, post this, for the last 2 years, the Ministry of Road Transport and Highways has been constantly missing its targets.

Now, let’s understand whether or not the government will be able to achieve its targets in FY24.

The Road ministry officials said in press meet that chances of achieving road project allocations equivalent to the target of 14,000 kms from the government look slim. Ministry figures indicate that till November 2023, only 2,815 kms of highway projects have been allocated. During the same period last year, allocations totalling 5,382 kms were given.

Not just this, as per the officials, it is difficult to achieve even the set highway construction target of 13,814 kms. Till December 2023, only 6,217 kms of new highways have been constructed, which constitute only 45% of the target set for the entire financial year.

According to rating agency ICRA, allocations related to highways generally dip in the last quarter of any financial year. This is also the case right before the elections, when the code of conduct is implemented. There are estimates of about 10,000 kms of roads being constructed in the entire financial year.

Now, how have companies in the road construction sector performed, and how do their valuations look?

Over the past 6-12 months, except for GR Infra, most companies in this sector have delivered positive returns. However, this company’s PE valuation, or price to earning multiples are cheap. Despite rising by around 80%, in a single year, Ashoka Buildcon remains the cheapest share in the entire sector, while Dilip Buildcon remains the most expensive.

Share market expert Santosh Singh notes that the reason why the valuations of these companies are not high is because the order books of these shares are strong. However, it remains to be seen how much in debt each of these companies are.

Now comes the most important question, how can you make a strategy related to shares of road construction companies before the general elections? What is the outlook for this sector?

In 2017, the Modi government launched the first phase of the Bharatmala programme. Under this, the government had set a target for constructing 34,800 kms of highways till 2024, which would pass through economic corridors, manufacturing hubs, borders and coastal areas. However, this project is running behind schedule, with expected completion in 2027-2028.

Under the Bharatmala programme, new highway constructions worth 27,384 kms have been ordered. Out of this, 15,045 kms have been constructed. And orders for about 8,000 kms worth of projects have not been given.

Instead of EPC, which means Engineering, Procurement, and Construction model, the government is increasingly planning to allocate more projects as per the Hybrid Annuity model. The government funds 100% of the project under EPC model. But under the HAM model, the government only bears 40% of the total project cost. The remaining 60% is borne by the developer.

As per Santosh Singh, you should invest in companies having order books of up to 1.5-2 years. In the road sector, KNR Construction can be bought with a target of Rs 350-400 and HG Infra can be bought with a target of Rs 1800 from the perspective of 1-1.5 years, he says.

All in all, one can anticipate slowness in activities related to road construction, which is what you can expect some ups and down in shares of these sectors. However, most companies possess healthy valuations in this sector, and shares of selective companies can be seen as investment opportunities for the long term