With order books at probably the highest levels in recent years, market participants are willing to ignore record-high valuations in many of these stocks. L&T remains the top pick of analysts. Others include KNR Infra, NCC, Ashoka Buildcon, KEC International, and Kalpataru.
Shares of these infrastructure companies have surged between 20% and 106% in the past six months. ITD Cementation has soared 106%, and Dilip Buildcon and J Kumar Infraprojects have jumped over 70% each. L&T gained 36%.
Following the run-up, valuations – as measured by the price-to-earnings (PE) ratio – of these stocks are above five-year averages. Analysts are, however, assessing their valuations on the basis of their earnings potential.
“The forward PE of construction stocks offers more comfort to the investor, even though the stocks have run up significantly in the past few months,” said Sneha Poddar, associate vice president-equity research at Motilal Oswal Financial Services. “This can be attributed to a high order book build-up which has increased revenue visibility over the next 4-5 years.” Poddar’s favourite picks are L&T and KNR.
Poddar believes the government’s push to develop rail, road, infrastructure, defence and engineering projects is driving order books.
Analysts said the current valuations may not be cheap but are at ‘fair’ levels. “The P/E in these sectors should be in the range of 13-15 times, and shouldn’t go up further,” said Varun Lohchab, head of institutional research at HDFC Securities. “The values have gone up in the last 6-9 months but the earnings, good operating leverage and high revenues can sustain it. We would recommend investors to selectively enter the sector. L&T, Ashoka Buildcon and NCC could give decent returns.”L&T’s PE is 41 times as against the five-year average of 31. Analysts said during the previous bull cycle for construction stocks between 2004 and 2007, the stock was trading at similar valuations but the current order book of around ₹4 lakh crore is way above levels back then.
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