INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

Infrastructure Construction is not a switch on/off machine – Wait for clarity

INDIA | INFRASTRUCTURE | Sector Update

5 May 2020

Infrastructure sector is abuzz with news of resumption of construction activity at various sites,

amidst partial lifting of lockdowns in various parts of the country. While these are encouraging

signs, we would like to caution investors against building false hopes. Construction industry is not

a switch on/off machine, which can be turned around by pressing a button. The road to

resumption of activity to its pre-corona level, is long and unwinding, and dependent on multiple

external factors. From a long -term perspective (18-24 months) most construction stocks appear

highly attractive at low valuations and a strong impending pipeline. But all hopes of a revival in

near future are wishful thinking, and must be acted upon, with caution.

Near term: Labour availability to remain an impediment, even after lockdown is lifted The biggest impediment for infrastructure companies to restart execution, is availability of

labour. Majority of labourers (60-70% for most companies) are migrants, who have either already

gone back to their native villages or are stuck somewhere in between their work and home. We

estimate less than 20% labour has stayed back close to construction sites (or been forced). This

means that even after the lockdown is lifted (assuming 17th May 2020), labour will take at least

30-45 incremental days to return to work sites in full capacity. Thereafter, execution can start in

full swing only if raw materials (cement/steel) also reach sites (resumption of logistics sector).

Overall, it means a structured resumption of the entire ecosystem of the construction industry

is required for the execution work to resume.

Resumption of construction activity will depend on orderbook breakups As per the latest government announcement, 130/284/319 districts in India have been declared

as Red/Orange/Green zones. Resumption of construction activity for each company will depend

on its orderbook composition. In this report, we have tried to map the companies' orderbooks

statewise – classifying the states into Red/Orange/Green, as per the severity of the spread of

Covid-19. We have also included segmental orderbook composition – focussing on projects likely

to get impacted more (eg urban transport/building projects) than others (eg highway, irrigation

projects in remote areas). Overall, Capacité, PSP Projects, JKumar and Sadbhav appear to have

the most vulnerable orderbooks, followed by NCC, IRB and Ahluwalia. KNR, Ashoka, and HG

Infra have the 'safest' orderbooks, as per our analysis.

Medium term: Does the government have the fiscal space to boost infra spending? Beyond the near term, the government needs to find fiscal space to be able to revive

infrastructure activity. The Covid-related fiscal packages (hopefully there are more) and the

shortfall in revenue/tax collection – are expected to lead to fiscal deficit slipping to 5-8% of the

GDP. Given the current dispensation’s penchant for maintaining fiscal discipline, we believe the

government might curtail its capex expenditure plans (especially infrastructure). This will lead to

a weak growth scenario for the sector, even in 2HFY21.

Long term: Strong fundamentals to ensure strong earnings growth in FY22 and beyond Notwithstanding the above concerns, the sector continues to possess strong balance sheets

(leverage less than 0.4x and interest coverage of more than 2x) and decent orderbooks

(average 3x book-to-sales) – which should provide a foundation for strong earnings growth, in

FY22 and beyond. As the economy recovers (hopefully in FY22), we see no reason for the

government to NOT revive its National Infrastructure Pipeline (NIP) – Rs 111trillion investment in

infrastructure over the next five years – providing a further fillip to the sector.

Invest, but with a longer-term horizon We believe that investors should wait for a few months for clarity to emerge on the impact of the

lockdown, and then take the plunge into infra stocks. The stocks are currently trading at

abysmally inexpensive valuations and would continue to offer significant upside, even after an

initial jump (if and whenever). Once clarity emerges, quality infrastructure names (with strong

balance sheets and orderbooks) would deliver significant returns over the next 12-18 months,

akin to the run-up during the 2014-15 cycle. We maintain BUY ratings on PNC, NCC, Ahluwalia,

KNR and Ashoka. Avoid Sadbhav and ITD Cem.

Companies NCC Ltd BUY CMP, Rs 24 Target Price, Rs 60

PNC Infratech BUY CMP, Rs 121 Target Price, Rs 230

Ashoka Buildcon BUY CMP, Rs 59 Target Price, Rs 140

KNR Construction BUY CMP, Rs 200 Target Price, Rs 250

Ahluwalia Contracts BUY CMP, Rs 178 Target Price, Rs 230

IRB Infrastructure BUY CMP, Rs 66 Target Price, Rs 125

ITD Cementation SELL CMP, Rs 38 Target Price, Rs 25

Sadbhav Engineering BUY* CMP, Rs 49 Target Price, Rs 100

*We have Buy rating on Sadbhav Engg only on

the back of the sharp correction in price, but we

continue to remain negative on the company

and the stock.

Vibhor Singhal, Research Analyst (+ 9122 6246 4109) vsinghal@phillipcapital.in Deepika Bhandari, Research Associate (+ 9122 6246 4138) dbhandari@phillipcapital.in

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

INFRASTRUCTURE SECTOR UPDATE

Short-term pain: The entire construction ecosystem needs to be revived Labour availability to remain the biggest impediment, even after lockdown is lifted As highlighted in our earlier report (read here), the biggest impediment for the infrastructure companies to restart execution after the lockdown is lifted is the availability of labour. Majority of the labour (60-70% for most companies) are migrant labourers who have either already gone back to their native villages or are stuck somewhere in between their work and home. We estimate that less than 20% labour has decided (or has been forced) to stay back close to their construction sites.

This means that even when the lockdown is lifted (assuming 17th

May 2020), labour will take at least 30-45 incremental days (from the day the lockdown is lifted) to return to their work sites in full capacity. Any partial lifting of lockdown in specific geographies (Orange/Green zones) before that, is just an eyewash – because the migrant labour will still not be able to reach those sites unless the travel lockdown is lifted too.

Raw material availability needs to be ensured at the construction sites Even after a large part of the labour reaches the sites, execution can start in full swing only if raw materials are also able to reach sites. This means restarting of cement and steel production and the resumption of transportation services by the logistics sector. Overall, it means a structured resumption of the entire ecosystem of the construction industry is required for the execution work to resume. Given the track record of the current (and former) governments, this appears to be wishful thinking!

The entire construction ecosystem needs to be revived

Source: PhillipCapital India Research

Challenges in reviving the entire construction ecosystem Labour availability Construction equipment

No labour in April Given lower pace of execution, not a big hurdle

Gradual return of labour in May/June If execution picks up, demand might revive quickly

Mandatory 14 days quarantine for external labour Raw materials availability

Social distancing regulations will reduce execution capacity significantly Limited inventory at sites

Logistics Production needs to be ramped up, simultaneously Entire logistics chain needs to be revamped immediately Cement, steel, aggregates

Raw materials need to reach sites on time and in required quantities Chemical, paints, bitumen, bricks, tiles, etc

Source: PhillipCapital India Research

Construc -tion

Labour

Constr Equipment, Aggregates

Chemicals, Bitumen,

Bricks, Tiles etc

Logistics

Steel

Cement

Page | 3 | PHILLIPCAPITAL INDIA RESEARCH

INFRASTRUCTURE SECTOR UPDATE

Resumption of construction activity will depend on orderbook breakups As per the latest government announcement, 130 districts in India have been declared as Red zones (where the spread of Covid-19 is much larger), and are recommended to have strict regulations. On the other hand, 284/319 districts have been declared Orange/Green (where spread is limited) – where lockdowns regulations are much lenient than the Red districts. Key districts in Red zone: Chandigarh, Mumbai, Thane, Pune, Nashik, Nagpur, Ahmedabad, Vadodara, Surat, Bengaluru (U/R), Indore, Bhopal, Gwalior, Jaipur, Jodhpur, Chennai, Madurai, Hyderabad, Agra, Lucknow, Kanpur, Gautam Buddha Nagar, Varanasi, Kolkata, Patna, Ranchi, Kannur and all 13 districts in Delhi. While it is impossible to map district-wise composition of the orderbooks, we have tried to map the orderbooks state-wide. And we have classified the states into Red/Orange/Green, as per the severity of the spread of Covid-19 in those states. We note that while these might not EXACTLY match with the government’s district-wise classification – it will provide a good idea of the orderbook exposure of different companies, to severe and not-so-sever zones.

A good part of orderbooks for many companies are in the ‘Red’ states

Source: Companies, PhillipCapital India Research

We find that Capacité, PSP Projects, JKumar and Sadbhav have the highest exposure to the red states. On the opposite end of the spectrum, KNR, NCC, Ashoka, Ahluwalia and HG Infra have the highest exposure to the green states. PNC, IRB and Dilip’s high exposure to UP/MP makes their exposure high to orange states. But overall, 36% of the cumulative sectoral orderbooks are in the red states, and so we expect construction activity to restart only gradually.

Statewise orderbooks of the construction companies

NCC Dilip Jkumar KNR PNC IRB Sadbhav Ashoka HG Infra Ahluwalia Capacite PSP

Mumbai** 7% - 63% - - - - - - 1% 93% 2% Maharashtra 15% 16% 71% - 15% - 29% 2% 6% 16% 96% 24% Delhi 8% - 28% - - - - - - 13% - - Gujarat 1% 3% 0% - - 30% 19% 6% - - - 73% Rajasthan 2% 2% - - - 37% 10% - 26% - - 2% UP 5% 18% 1% - 63% 33% 12% 13% 17% 10% - - MP - 16% - - - - 2% - - - - - Tamil Nadu 5% - - 15% - - - - - - 1% - Karnataka 11% 18% - 23% 14% - 14% 28% - - - 0% AP 20% 4% - 59% - - 0% 3% - - - - Telangana 9% 4% - - - - - 6% 15% - - - Jharkhand 2% 9% - - - - 9% 13% - - - - Bihar & WB 10% - - - 6% - - 6% - 42% - - Punj & Hary 1% - - - - - 1% 7% 32% 14% - - Others 12% 10% 0% 3% 3% - 3% 17%* 4% 5% 3% -

Source: Companies, PhillipCapital India Research (*includes 10% from TOT project, **Mumbai included in Maha)

24% 19%

99%

15% 30%

48%

8% 6%

29%

96% 98%

12% 36%

1%

15%

63%

70% 24%

13%

43% 10%

52%

35%

82%

20% 24%

63%

47% 56%

12% 10% 3% 3% 3%

17% 4% 5% 3%

NC

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Dili

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Jku

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KN

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IRB

Sad

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Ash

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HG

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Cap

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PSP

Red Orange Green Others

Red/Orange/Green classification of districts, as per govt announcement

on 1st

May 2020

We classify states as:

Red – Maharashtra, Delhi, Gujarat.

Orange – Rajasthan, UP, MP, Tamil Nadu.

Green – All other states and union territories (UTs).

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INFRASTRUCTURE SECTOR UPDATE

To get even better perspective, we have tried to list out select large projects in companies’ orderbooks, which might be witness quick pick up in execution, despite being in a Red state (eg projects in far-flung or unaffected districts of those states) – or get delayed despite being in Orange/Green state (stuck/delayed due to other reasons).

Key projects for few of the construction companies NCC State Rs mn % OB Status

Jkumar State Rs mn % OB Status

Mumbai Nagpur expway Maha 16,824 7% Likely

Mumbai Metro Line 3 Maha 24,085 19% Partial Mumbai Metro Bhawan Maha 8,679 4% Stuck

Mumbai Metro Line 2A/7/6 Maha 40,107 32% Partial

Narauji Nagar Delhi 15,597 7% Delayed

Pune metro Maha 4,362 4% Partial AP Irrigation/Water AP 28,831 12% Likely

Delhi Orders Delhi 34,488 28% Partial

APTIDCO Orders AP 11,846 5% Likely

Mumbai Roads/Bridges Maha 19,868 16% Partial

Total Orderbook

2,39,680

Total Orderbook

1,24,433 Sadhav Engg State Rs mn % OB Status

Ahluwalia State Rs mn % OB Status

Mining orders Across 20,701 24% Delayed

AIIMS Nagpur Maha 4,110 6% Likely EPC Road Across 28,658 33% Likely

IIM Nagour Maha 2,598 4% Likely

HAM UC Across 14,658 6% Likely

CPWD Delhi Delhi 2,479 4% Delayed HAM delayed Across 19,495 22% Delayed

South Asian University Delhi 834 1% Delayed

Total Orderbook

87,262

Total Orderbook

68,960 IRB Infra State Rs mn % OB Status

Capacite State Rs mn % OB Status

3 NHAI projects Raja 18,793 37% Likely

Private Builders projects Maha 51,680 48% Delayed 2 NHAI projects UP 16,722 33% Likely

Private Builders projects Across 3,010 3% Likely

1 HAM Project Gujarat 15,323 30% Delayed

CIDCO Project Maha 44,720 41% Delayed

Total Orderbook

50,837

Total Orderbook

1,08,200 Source: Companies, PhillipCapital India Research

Overall, there are certain types of projects that are likely to get impacted more (eg Urban transport projects, Buildings in urban areas etc) as compared to other projects (eg Highway, Irrigation projects in remote areas). The following table provides a broad overview of how companies’ execution might be affected, due to the type of the projects in their orderbooks.

Segment-wise orderbooks of the construction companies Segmental NCC Dilip Jkumar KNR PNC IRB Sadbhav Ashoka HG Infra Ahluwalia Capacite PSP

Buildings (U) 23% - - - - - - - - 100% 100% 100% Roads (U) 3% - 38% - - - - - - - - - Metros 2% 2% 55% - - - - - - - - - Other Urban 3% - - - - - - 1% - - - - Buildings (NU) 17% - - - - - - - - - - - Roads (NH/SH) 10% 70% - 75% 100% 100% 72% 74% 100% - - - Irrigation 9% - - 25% - - 4% - - - - - Mining 8% 19% - - - - 24% - - - - - Power - - - - - - - 13% - - - - Others 25% 9% 6% - - - - 12% - - - -

Might be delayed 31% 2% 94% 0% 0% 0% 0% 1% 0% 100% 100% 100%

Source: Companies, PhillipCapital India Research (*U = Urban; NU = Non-Urban; NH/SH = National/State Highway)

Having said that, various government bodies have already started various activities related to execution of infrastructure projects. The following table lists some of the media articles, highlighting the government bodies commencing their bidding/awarding/funding activities.

Some construction related activities have started (bidding, awarding funding) Delhi Metro Rail Corpn invites bid for works of Patna MRTS Phase-I

UPMRC conducts pre-bid for Kanpur, Agra Metro

TOT bundle 4 bid due date extended by 1 month to 15 May

L&T Construction Awarded (Significant*) Contracts for its Heavy Civil Infrastructure Business

L&T bags significant orders worth up to Rs 2,500cr from domestic clients

GR Infraprojects bags Rs 592.17 crore contract of Delhi SNB-Alwar RRTS corridor

NHAI clears contractors' bills worth Rs 25,000cr

Kanpur Metro Rail project got €650 million loans from the European Investment Bank

JICA, govt sign Rs 15,295-cr loan pacts for major rail projects for public, freight transport; Mumbai Metro L3 gets Rs2480cr

Source: Media reports, PhillipCapital India Research

Capacité (51%) and PSP (64%) have high share of private orders in their orderbooks. Other companies have less than 2% private share.

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INFRASTRUCTURE SECTOR UPDATE

Even in the red states, execution work has started on select projects, especially those in far-flung or unaffected districts of those states. The list below shows some of the large projects, across the country (esp in the red states) that are likely/unlikely to see execution starting in the near future – and their current status.

Status update of various large infrastructure projects Project Developers Status in April Current activity level Link 1 Link 2 Link 3

Mumbai Nagpur expressway Dilip, PNC, NCC, L&T, Sadbhav Low level activity Medium Link Link Link

Coastal Road L&T, HCC Low level activity High Link Link Link

Mumbai Trans harbor link L&T Low level activity High Link Link

Expressways in UP (Purvanchal, Gorakhpur, Bundelkhand)

Dilip, PNC, Ashoka, GR Infra Completely stopped Low Link

Delhi Mumbai greenfield expressway HG Infra, GR Infra Low level activity Medium

NHAI projects All developers Low level activity Medium Link Link Link

NHAI toll collections IRB, Ashoka, Sadbhav Completely stopped Started Link

Mumbai Metro line 3 JKumar, L&T, ITD Cem Low level activity Medium Link Link Link

Mumbai Metro line 2/7 NCC, Jkumar Completely stopped Medium Link Link Link

Mumbai Metro line 4/6 Jkumar, NCC, R-Infra Completely stopped Medium Link

Bangalore Metro projects ITD Cem, NCC, L&T Completely stopped Medium Link Link Link

Kochi Metro

Completely stopped Low Link

PMAY Projects in AP NCC, L&T, AFCONS Completely stopped Low

PMAY Projects in Maharashtra Capacité, L&T Completely stopped NA

AIIMS/IIT projects across India L&T, NCC, Ahluwalia Completely stopped Low

Irrigation projects in AP NCC, KNR, Megha Completely stopped Medium Link

Irrigation projects in Telangana NCC, KNR, Megha Completely stopped Medium Link

Irrigation projects in Maharashtra Multiple developers Completely stopped Medium Link

Source: Media reports, PhillipCapital India Research

Following the social distancing guidelines will be extremely difficult After lifting of lockdowns, construction companies will have to follow strict guidelines with completely new site/labour requirements and social distancing norms. Mandatory quarantine of external labour, disinfectant tunnels, provisions for gloves, masks, and other requirements will add to execution woes for companies. Social distancing guidelines will mean the companies will be able to operate at less than 70% capacity at most sites. And there are many more norms! The guidelines will be extremely difficult to follow and lead to slower pickup in execution, in the near/medium term. Over the longer term, if these practices were to stay, they could impact the margins of the companies permanently.

Social distancing norms which will be extremely difficult for companies to follow Initial requirements Social distancing requirements

On day 0, before resuming the work on sites post lockdown, mandatory medical check-up will be arranged for all workers.

Avoid large gatherings or meetings. Maintain at least 1 metre (3 feet) distance from persons.

The workers coming from outside should observe home quarantine for at-least 14 days as per the guidelines issued by MoHFW.

Not more than 2/4 persons (depending on size) should be allowed to travel in lifts or hoists.

Minimum 6ft distancing to be maintained while out of rooms.

Site requirements Labour requirements

All vehicles and machinery entering the premise should be disinfected by spray mandatorily.

The workers staying outside (which are always nearby) should reach the site either by walking or by bicycle.

All construction material arriving at site should be left idle for 1 day before use to ensure safe usage.

Mandatory thermal scanning of everyone entering and exiting a construction site will be done for checking fever / body temperature.

Wipe down interiors and door handle of machines or construction vehicles. Workers should not share their belongings like food, water bottles, utensils, mobile phones, etc. with others.

50% engineering staff to be allowed to travel to site only through private-own vehicle. No ride-sharing to be done strictly.

Workers should clean hands frequently by washing them with soap and water for at least 40 seconds.

Entire construction site will be disinfected on daily basis (including site office, labour camp, canteens, pathways, toilets, entry / exit gates).

All worker camp to have minimum 2-3 rooms as isolation wards. Facilities requirements

De-sanitization of camp (all areas, rooms) at frequent intervals (weekly once). Hand gloves to be used by workers handling material coming from outside.

Operate at 50% staff strength, total staff deployment on rotation basis. Mandatorily wear face masks while working on site.

All entrant at project site to go through disinfection tunnel. Non-touch garbage bins with biodegradable garbage bags.

All entrants at project site to be measured for body temperature. Sufficient quantities of hand wash / soaps and related items should be available at the site.

All entrants at project site to use face mask mandatorily. Bathrooms / toilets Usage must be scheduled to avoid crowding.

Source: CREDAI, Media reports, PhillipCapital India Research

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INFRASTRUCTURE SECTOR UPDATE

Medium term: Does the government have the fiscal space to boost infra spending? Beyond the near term, the government needs to find fiscal space to be able to revive infrastructure activity. The Covid-related fiscal packages should consume (hopefully) atleast Rs 2-3trillion – or 1-2% of GDP (which itself is likely to be revised downwards). In addition, the government will also face lower tax collections (GST, excise, corporate and personal income tax), further widening the deficit. And lastly, in the current market environment, the government’s disinvestment target of Rs 2trillion appears highly unlikely. As per our analysis, the government is likely to face an incremental fiscal slippage of atleast Rs 6-7 trillion (as of current situation) – on account of stimulus packages and lower tax collections. That translates into 3-5% of GDP – over and above the 3.5% fiscal deficit that the FY21 budget had assumed. Given the current dispensation’s penchant for maintaining fiscal discipline, we find it very hard to believe that it will loosen its purse strings to boost infrastructure activity, though this might be the need of the hour, to create jobs and revive the economy in a post-Covid world.

Likely slippages in the fiscal math for FY21

Source: PhillipCapital India Research

Our economist’s view on the possible fiscal scenarios for FY21

Rs bn % of GDP

FY20RE FY20PC FY21BE FY21PCE FY20RE FY20PC FY21BE FY21PCE

Budget statistics Case A Case B Case C Case A Case B Case C

Nominal GDP 2,04,422 2,02,565 2,24,894 2,10,111 2,10,111 2,03,983

Revenue receipts 18,501 17,344 20,209 17,202 16,065 13,266 9.1 8.6 9.0 8.2 7.6 6.5

Tax (net) 15,046 13,889 16,359 13,352 12,565 10,266 7.4 6.9 7.3 6.4 6.0 5.0

Non – tax 3,455 3,455 3,850 3,850 3,500 3,000 1.7 1.7 1.7 1.8 1.7 1.5

Capital receipts 8,485 8,775 10,213 13,220 15,857 19,156 4.2 4.3 4.5 6.3 7.5 9.4

Recovery of loans 166 166 150 150 150 150 0.1 0.1 0.1 0.1 0.1 0.1

Other receipts (disinvt) 650 500 2,100 1,200 800 500 0.3 0.2 0.9 0.6 0.4 0.2

Borrowings and other liab. 7,669 8,109 7,963 11,870 14,907 18,506 3.8 4.0 3.5 5.6 7.1 9.1

Total receipts 26,986 26,119 30,422 30,422 31,922 32,422 13.2 12.9 13.5 14.5 15.2 15.9

Total revenue Exp 23,496 22,909 26,301 28,922 30,922 31,922 11.5 11.3 11.7 13.8 14.7 15.6

Total capital Exp 3,489 3,210 4,121 1,500 1,000 500 1.7 1.6 1.8 0.7 0.5 0.2

Total expenditure 26,986 26,119 30,422 30,422 31,922 32,422 13.2 12.9 13.5 14.5 15.2 15.9

Fiscal deficit 7,669 8,109 7,963 11,870 14,907 18,506 3.8 4.0 3.5 5.6 7.1 9.1

Incremental deficit 3,907 6,944 10,543 2.1 3.6 5.6

Source: PhillipCapital India Research

•Rs 1.5-1.8 trillion

•Rs 1.5-2.0 trillion

•Rs 1.0-1.5 trillion

•Rs 2-3 trillion

Incremental expenditure

on fiscal stimulus packages

Lower indirect taxes (GST, excise, etc.)

Lower direct taxes

(corporate, personal

income, etc.)

Lower realisation of

disinvestment target

Page | 7 | PHILLIPCAPITAL INDIA RESEARCH

INFRASTRUCTURE SECTOR UPDATE

Our economist, Anjali Verma, expects the fiscal deficit to slip by 2-5%, beyond the budgeted 3.5% of GDP, for FY21. She sees possible “cuts in capital expenditure in FY21 in order to meet covid-crisis-related stimulus (shift from capex to revenue expenditure; non-priority revenue expenditure can also be curtailed).” Read her detailed report here.

In fact, we would be happy if the government is able to meet its target spending on various infrastructure schemes. FY21 budget had an outline Rs 1.5/1.6/0.9 trillion as expenditure targets for roads/railways/Urban departments. We are not even talking about the National Infrastructure Pipeline (NIP) here, which promised to spend Rs 111 trillion over the next five years, on various infrastructure schemes (we do that analysis in the next section, for longer term perspective). As of now, if the government manages to spend the targeted amounts in FY21, it will provide a big boost to the sector in the medium term, and enhance the growth visibility for the long term.

Budgetary allocations for infrastructure segments do not have a high share of total government expenditure FY20RE FY21BE % yoy

Rs bn

Budget

Support IEBR

Capital

Outlay

Budget

Support IEBR

Capital

Outlay

Budget

Support IEBR

Capital

Outlay

Roads 830 750 1,580 918 650 1,568 11% -13% -1% NHAI 367 750 1,117 425 650 1,075 16% -13% -4%

Urban development 423 477 899 500 319 819 18% -33% -9% Railways 700 882 1,582 722 908 1,630 3% 3% 3% Shipping 15 39 55 18 37 55 18% -5% 1%

Power 159 524 683 159 499 658 0% -5% -4%

Total 2,126 2,673 4,800 2,318 2,413 4,730 9% -10% -1%

Source: Budgetary documents, PhillipCapital India Research

We are also worried about the timing of the lockdowns associated with the spread of Covid-19. As depicted below, the entire Q1FY21 is expected to be impacted by the lockdowns and gradual return of labour to the construction sites. Q2FY21 is a seasonally weak quarter mainly due to the monsoon. Q3FY21 will have some residual impact of monsoon in some parts of the country. Hence, a real recovery can only start in late Q3 or Q4FY21, which is also dependent on the fiscal priorities of the government.

All four quarters in FY21 are likely to see some headwinds

Source: Companies, PhillipCapital India Research

•April – complete lockdown

•May/June – labour unavailability

Q1FY21

•July – monsoon in some parts

•Aug/Sep – monsoon in most parts

Q2FY21

•Oct – monsoon in some parts

•Government's fiscal concerns

Q3FY21

•Overall, government's fiscal concerns

•Execution might pick up if the government tries to achieve its targets

Q4FY21

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INFRASTRUCTURE SECTOR UPDATE

Long-term: Strong fundamentals to ensure strong earnings growth Notwithstanding the near/medium term concerns, the sector continues to possess strong balance sheets and decent orderbooks, which should provide a foundation for strong earnings growth in FY22 and beyond. We also see no reason for the govt to NOT revive its National Infrastructure Pipeline (NIP) Rs 103trillion investment in infrastructure over the next five years, providing a further fillip to the sector.

FY22 growth to be driven by current orderbooks Our Q3FY20 ‘orderbook keeper’ (read report here) demonstrates that almost all EPC companies currently have decent orderbooks, (2-3x book-to-sales). This provides decent revenue visibility for FY22, given that FY21 will be the year of moderate execution. Hence, even if government bodies take time to start order awarding in FY21, large part of the growth expected in FY22 can be achieved from the current orderbooks itself. Any meaningful pickup in order award activity, will be a cherry on the cake.

Most EPC companies have orderbooks in the range of 2.0-3.0x book-to-sales

Balance sheet much stronger than the earlier cycle Almost all construction companies have leverage of less than 0.4x and Interest coverage ratio of more than 2x, unlike the last cycle, where the leverage was high and interest coverage was low. This ensures that even with a complete lockdown and drying up of revenues, companies do not get into the vicious loop of interest-cashflow-debt, as they did in the 2011-14 downcycle.

As compared to FY14, the current balance sheets and debt serviceability are in much better shape

Source: Companies, Phillip Capital India Research

250 124 65 130 107 62 76 221 123 114 68 95 86 152 31 0.0

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0.4

0.6

0.8

1.0

1.2

NCC Jkumar KNR Ashoka PNC

Leverage

Leverage (x)

FY14 FY20E

0.7

2.1

4.5 4.1

3.7

1.7

3.1

7.1

4.6 4.6

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

NCC Jkumar KNR Ashoka PNC

Interest Coverage

Interest Coverage (x)

FY14 FY20E

Almost all EPC companies currently have decent orderbooks, representing 2-3x book-to-sales

Page | 9 | PHILLIPCAPITAL INDIA RESEARCH

INFRASTRUCTURE SECTOR UPDATE

NIP to lay the foundation of strong growth in FY22 and beyond In September 2019, the government had unveiled National Infrastructure Pipeline (NIP) – a detailed plan to invest Rs 103trillion in infrastructure over the next five years. As the economy recovers (hopefully in FY22), we see no reason for the govt to NOT go back to the plan. Even at the time of announcement, we were sceptical of the Rs 103trillion amount and expected it to be closer to Rs 60-70trillion. In a post-Covid world, if the government can achieve our expectations, there would be a huge fillip to the sector, leading to strong earnings growth for companies in FY22 and beyond.

The NIP pipeline envisages Rs 102trillion investment – we expect Rs 82trillion Rs trn Expenditure Centre State Private PC estimates

Roads 19.64 4.91 7.07 7.66 10.00 Urban 16.29 5.05 11.08 0.16 16.29 Energy 24.58 7.34 6.92 10.29 14.49

Conventional 11.79 4.35 6.70 0.71 6.00 Renewable 9.30 - - 9.30 5.00 Others 3.49 2.98 0.21 0.29 3.49

Railways 13.69 11.90 0.14 1.64 10.00 Irrigation 7.73 1.70 6.03 - 7.73 Rural Infra 7.73 5.87 1.85 - 7.73

Airports 1.43 0.33 0.54 0.56 1.43 Others 10.91 4.25 4.25 2.40 10.91

Total 102.00 41.36 37.88 22.71 78.58

Source: Companies, PhillipCapital India Research

Even our bottom-up analysis of some of the key segments of the infrastructure sector reveal a healthy pipeline that will be awarded over the next five years.

Bottom-up analysis of the infrastructure opportunity Roads Length, km Cost, Rs bn

Irrigation

Cost, Rs bn

Bharatmala 83,677 6,923

State plans

3,000

NRLP

2,000

Total 83,677 6,923

Total

5,000

Metros Length, km Cost, Rs bn Buildings Units Cost Rs bn

Operational cities 164 790

PMAY 22 mn 3,130

Under construction 212 777

Smart Cites /AMRUT 100/500 1,000

Under development 511 1,117

IITs/IIMs/AIIMs 6/9/12 441

Total 886 2,684

Total

4,571

Source: PhillipCapital India Research

Extremely attractive valuations offer huge potential upside Last, but not the least, most infrastructure stocks are currently trading at highly attractive valuations. Once clarity emerges, quality infrastructure names (with strong balance sheets and orderbooks) can deliver significant returns over the next 12-18 months – akin to the run-up during the 2014-15 cycle.

Most infrastructure stocks are currently trading at extremely attractive valuations

Source: Companies, PhillipCapital India Research

4.8

12.6

3.7

11.5

7.6 7.7

9.2

1.3

3.7

9.2

7.6

5.3

9.2

-5.0

-

5.0

10.0

15.0

Ashoka Sadbhav NCC KNR ITD Cem PNC Infra Ahluwalia

FY22 PE Adjusted for BOT

The government recently published Vol 2 of the NIP – which upgraded the pipeline to Rs 111trillion.

Page | 10 | PHILLIPCAPITAL INDIA RESEARCH

INFRASTRUCTURE SECTOR UPDATE

Recommendations and Valuations Infrastructure sector – recommendations based on strengths/weaknesses Negatives Positives Recommendation

IRB Infra Weak orderbook; toll collection to be severely impacted

Lower competition in BOT space; GIC deal improves the balance sheet

-

Ashoka Buildcon McQ deal will be even more difficult to close now Diversified orderbook; strong balance sheet Wait for clarity to emerge on McQ deal

Sadbhav Engg Poor succession planning has led to business in doldrums

Cash infusion from SIPL stake sale to improve balance sheet

Avoid

NCC Orders stuck in AP Diversified orderbook; strong balance sheet - just needs few large orders

BUY

KNR Construction NA Superior execution track record; strong balance sheet

BUY

ITD Cementation Contingent liability related to metro orders; poor track record

Strong orderbook Avoid

PNC Infratech NA Superior execution track record; strong balance sheet

BUY

Ahluwalia Contracts Inconsistent performer over the last many quarters

Strong orderbook; net cash balance sheet BUY

Jkumar* OB concentration in Maharashtra; corporate governance issues in last 3 years

Strong orderbook; execution expected to return to full swing

-

Dilip Buildcon* Capital intensive model; cashflow to remain stretched

Strong execution track record; orderbook diversifying

Avoid

Capacité Infra* High exposure to private real estate Strong orderbook; MHADA and CIDCO orders will partly mitigate impact

Avoid

PSP Projects* High exposure to private real estate Small local player; works with tier corporates Avoid

Source: PhillipCapital India Research Estimates (* Not under coverage)

Infrastructure sector – Valuation table Mkt Cap

Rs bn

Price EPC Target Multiple

Our Target EPC Valuation

BOT/Others Valuation

CMP implied FY22 PE (EPC) Company CMP Rating Target % Upside

IRB infra 23.3 66 Buy 125 89% 5.0 89 36 1.7 Ashoka Buildcon 16.6 59 Buy 140 137% 8.0 97 43 1.3 Sadbhav 8.4 49 Buy 100 104% 5.0 17 83 -8.8 NCC 14.6 24 Buy 60 147% 9.0 60 - 3.7 KNR 28.2 200 Buy 250 25% 12.0 210 40 9.2 ITD Cementation 6.5 38 SELL 25 -34% 5.0 25 - 7.6 PNC Infra 31.1 121 Buy 230 90% 12.0 192 38 5.3 Ahluwalia 11.9 178 Buy 230 29% 12.0 230 - 9.2

Source: Company, PhillipCapital India Research Estimates

Valuations Infrastructure sector – Valuation table

Company _____P/E_____ ___EV/EBITDA___ _____ROE_____ _____D/E_____ _____P/BV_____

FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E

IRB Infra 3.5 -21.7 8.0 8.1 0.5 -1.4 2.3 2.4 0.3 0.3

Ashoka Buildcon 5.2 4.8 5.6 3.9 8.5 11.4 0.3 0.2 0.6 0.5

Sadbhav Engg 11.7 12.6 8.7 7.3 0.9 3.1 0.6 0.8 0.4 0.4

NCC 4.1 3.7 4.1 3.2 3.7 7.4 0.4 0.4 0.3 0.3

KNR 12.9 11.5 6.8 4.6 7.0 12.3 0.1 0.1 1.6 1.4

ITD Cementation 11.5 7.6 4.5 3.4 1.9 7.3 0.5 0.4 0.6 0.6

PNC Infra 6.7 7.7 6.2 4.5 9.4 12.6 0.1 0.1 1.1 1.0

Ahluwalia 15.8 9.2 5.4 3.8 8.7 12.8 0.0 0.0 1.3 1.2

Company Orderbook Book- Revenue growth EBITDA Margin Earnings Growth ____WC Days___

Rs bn to-Bill FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E

IRB Infra 68 1.3 -14% 15% 36% 33% -94% -363% - -

Ashoka Buildcon 95 2.4 -10% 25% 11% 13% -27% 50% 121 112

Sadbhav Engg 86 3.0 1% 25% 11% 12% -67% 242% 413 338

NCC 250 2.7 -10% 25% 11% 12% -47% 110% 239 208

KNR 65 2.9 -10% 25% 18% 20% -44% 99% 93 99

ITD Cementation 130 4.8 -10% 25% 9% 10% -63% 311% 123 109

PNC Infra 107 2.2 -12% 25% 13% 14% -43% 52% 137 135

Ahluwalia 76 4.6 -10% 25% 11% 13% 2% 68% 166 161

Source: PhillipCapital India Research Estimates

Page | 11 | PHILLIPCAPITAL INDIA RESEARCH

INFRASTRUCTURE SECTOR UPDATE

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.

Large cap stocks Rating Criteria Definition

BUY >= +10% Target price is equal to or more than 10% of current market price

NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10%

SELL <= -10% Target price is less than or equal to -10%.

Mid cap and Small cap stocks Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

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Page | 12 | PHILLIPCAPITAL INDIA RESEARCH

INFRASTRUCTURE SECTOR UPDATE

Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

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No

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No

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No

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Page | 13 | PHILLIPCAPITAL INDIA RESEARCH

INFRASTRUCTURE SECTOR UPDATE

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