Dilip Buildcon Ltd: Buy

CMP: Rs.245.75

India is one of the world's fastest-growing major economies, where construction sector will be a key driver of long-term growth; as millions of Indians migrate to cities in search of high-quality jobs. 

It is expected to grow at an AAGR of  more than 6% during 2023 + 2026.

According to experts, India's urban population will reach 52.50 crores by 2025 and 60 crores by 2036, representing a rapid increase from the current 40 crores, necessitating the construction of massive amounts of new housing and infrastructure. 

Furthermore,  according to a report in the Financial Express, in the second quarter of 2022, India’s construction sector was valued at over Rs.3,300 trillion. This was a substantial increase from the second quarter of 2020, when the value decreased owing to the COVID-19 pandemic. 

The infrastructure sector includes electricity, bridges, dams, highways, and urban infrastructure development. A massive frame can embody the anatomy of India's aspirations. The construction industry, which is one of India's most investment-driven sectors, serves as the spine that keeps it upright.

The government has followed a counter-cyclical policy through the last two years as it has attempted to regain growth momentum after the near collapse during the 2020 lockdown. The Budgets have since focussed on building infrastructure capacity. One key measure is the speeding up of the building of highways.

As a result, there are healthy order books across road developers and this means steady revenues for developers through the next three fiscals. In 2021-22, NHAI awarded over 12,000 km of roads in 127 new projects, an increase of 22 per cent year-on-year (YoY). Of these, 62 projects were under HAM (hybrid annuity model) and 63 were under EPC (engineering, procurement and construction).

Road-building has been quite successful with an average of 28.6 km per day being rolled out in 2021-22, but this was slower than 36 km per day in 2020-21. In 2022-23 there’s a commitment to expand the award to 25,000 km under the PM Gati Shakti National Master Plan. If this comes through, the order book will ensure revenues until 2025-26.

From April 2021 to January 2022, only 6,684 kilometers of national highways were constructed against 9,132 kms a year-ago. The sluggish trend in road construction was due to disruption caused by Covid-19 and prolonged monsoons. A similar trend has also been observed in the contract awarding activities - only 6,000 kms of roads contacts have been awarded between April 2021 to January 2022 compared to 6,696 kms in the same period last year. But the sluggishness in the sector may soon be a thing of the past, with FY22 Budget increasing its focus on infrastructure spends. The allocation to MORTH (Ministry of Road Transport and Highways) has increased by 70 per cent year-on-year or by ₹80,000 crore to ₹1.9 lakh crore.

Allocation to NHAI has moved up two-fold at ₹1.34 lakh crore versus previous year’s budget. The government plans to expand the national highways network by 25,000 kms in FY23.

Post lifting of Covid - 19 related restrictions,, the infrastructure sector has started to perform in its full potential. 

One of the stock in this sector which deserves attention is Dilip Buildcon Ltd (Rs.245.75). The net order book of Dilip Buildcon Ltd as on 30 June 2022 stood at a whopping Rs.25,160.2 crore.

You need to buy and hold. The infra stock hit a 52-week high of Rs.749.30 on October 13, 2021 and a 52-week low of Rs.233.80 on March 29, 2022.

However, Kotak Securities is negative on the stock. Kotak Securities said in its note in May, 2022: "Though the present strong order book gives decent visibility on revenues, legacy orders having lower margins as well as higher working capital will keep performance under pressure".

On the positive side, Kotak Securities said in May, 2022 that in FY22 order inflow was Rs.7800 crores. Analysts said this provides visibility at 2.8x FY22 revenue.

Incidentally, the bad performance of the company in H1FY23E is mostly due to the execution of legacy orders having lower margins. However, margins are expected to improve in the H2FY23E and the work is going on in full swing post lifting of Covid- 19 related lockdowns.