Pick-up in awarding of road projects remained muted in June quarter

NHAI awarding key for roads players; cyclically sector well-placed: In Q1FY26, we haven’t seen any pick-up in roads award. The ordering has been muted whilst the award pipeline is pegged at INR 3.5trn. Of this, BOT is 20%, EPC 10%, and HAM 70%. Recent steps taken by NHAI to strengthen bidding and increase entry barriers is aimed to keep frivolous aggressive bidders out. We have seen smaller unlisted players bidding 25-40% below NHAI cost, which is very aggressive and casts aspersions on road quality. Buildings, T&D, urban infra projects saw pick-up in awarding. We expect FY26 NHAI ordering to be back-ended at INR 600bn. Road/diversified EPC players are looking at participation in non-road segments like solar, BESS, transmission TBCB, railways, river interlinking etc. to keep growing. Cyclically, the EPC players are sitting on lowest order inflow, lowest valuation multiple and muted growth expectations. We believe that any recovery in ordering will help sector re-rating.

Domestic T&D (transmission & distribution) pipeline strong, major awarding to pick up from Q3FY26: Investments in the renewable power sector is emerging as a big decadal theme alongside defense and power security. HVDC projects balance pipeline is INR 1trn and expected to be awarded over the next two years. This shall be split between EPC (45%) and Equipment players (55%). BESS is emerging as a significant theme and is up for localization as currently batteries are imported from China. Cummins India has launched BESS solution and we expect this to pick up as government mandates on localization get rolled out. MNC companies have undertaken new capacity build-outs in traditional segments and new opportunities like clean energy/automation. This expansion is seen as catering to export and local demand. Punchy capital goods valuation remains an area of concern though growth and margin outperformance augur well.

Earnings trend YoY/QoQ: We expect EPC/infra universe revenue/EBITDA/PAT to grow/decline 2.8/-3.2/-32% YoY to INR 195/25.5/9.4bn, with EBITDA margin at 13.1% (-0.8bps YoY). In capital goods, revenue/EBITDA/PAT are expected to grow/decline by 13/17.5/23.4% YoY to INR 888.1/96.2/57bn, with EBITDA margin at 10.8% (+42bps YoY). The valuation of core EPC/infra is at 23.3/16.9x FY26/27E core EPS, which is in-line with the long-term mean of 16x. Given the expected increase in execution on QoQ basis, we see a case for PE rerating for EPC players. For capital goods, the valuation stands at 46.9/35x for FY26/27E.

Diversification as a theme necessary for road dominant players’ existence; asset monetization proceeds; new drivers augur well for growth: Roads ordering has significantly slowed down over FY24/25. This was key driver of ordering contributing 50-60% yearly inflows for EPC companies. Muted ordering led to miss in growth guidance and valuation de-rating. Diversification is now paramount to maintaining growth trajectory and new drivers like solar, BESS, river interlinking, and T&D present an opportunity to make up loss in order inflows from roads. Some of these new orders are coming on developer models; hence, players with strong balance sheets stand to gain.

Recommendations and stock picks: We expect a favorable risk-reward with EPC sector at cyclically low valuation. One can add strong balance sheet plays as (1) ordering remaining strong in renewables, T&D, buildings, and revival expected in water & railways; while roads will be muted; (2) asset monetization fructifying; (3) strong balance sheets and stable NWC days; and (4) likely improvement in cash flow generation.

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Source: HDFC Securities Institutional Equities

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