Construction companies on a firm footing deliver big returns

Construction companies are often faced with two challenges – winning profitable projects, and executing them on time. In the three months to June, KNR, PNC Infratech and Dilip Buildcon from this fraternity surprised the Street with the pace of project execution.

These companies clocked 15-40 per cent growth in revenues during the quarter. With large order books for each of these companies, the next trigger the Street awaits is sustained speed of execution.

Over the past one month, the stocks of these companies have gained 10-15 per cent. After the latest earnings, analysts have upgraded the ratings on these stocks to “buy”. According to Bloomberg consensus estimates, these companies still have potential to offer 28-31 per cent returns in a year.


Besides a voluminous order book, what works in favour of these companies is their strong balance sheet. Based on FY18 financials, these companies have debt-equity ratio between one and two. Set against their sturdy order book, this appears comfortable, as execution of projects should provide the necessary cash-flows to service interest expenses and enhance earnings.

These companies trade at relatively lower valuations despite recent price increases. FY19 estimated enterprise value (EV) of the companies relative to their operating profit before depreciation (EBITDA) is at 7-15 per cent discount to their respective long-term average valuations. Relatively lower valuations and better growth prospects mean these stocks could climb further.