Transportation share price target

Union Cabinet has approved NHAI's proposal to set up an Infrastructure Investment Trust (InvIT) and monetise its completed highway projects.

High frequency indicators, a harbinger of the logistics industry's performance, worsened in Sep'19, marking the end of a sedate Q2FY20.

Top Picks: LT, PNC, KNR & Capacite. All engines yet to fire: After big bang announcements on infra spend in Roads/Railways/Water etc, the ordering is yet to play out on the ground. NHAI bidding is expected to pickup from Nov-19 where we estimate 4,500km to be bid out at an EPC cost of Rs 743bn. State project awards from UP worth Rs 120bn will fill the order vacuum in 1HFY20. To sum up, 1HFY20 was a washout for most of the road developers with 2HFY20 looking robust.

We attended an analyst meet hosted by NHAI on Bharatmala Pariyojana phase-I (BMP).

NHAI's maiden analyst meet intended to address issues surrounding the long term sustainability of National Highways program. Being an authority, analyzing NHAIs financial position from the perspective of an Incorporated PSU would not be a fair assessment. Going forward, NHAI may continue to award a mix of viable projects as well as non-viable projects of strategic importance. Globally, highway programs are funded by fuel cess and toll collection rights. With an increasing share of fuel efficient and electronic vehicles, Governments across the globe are funding highway programs through fiscal initiatives. Visibility beyond BM1 remains an overhang as saturation would kick in. Companies will have to remodel their business to de-risk NH ordering concentration risks. After adverse news flow over the past 2 months, burgeoning debt level and slower than expected ordering, NHAI held its maiden investors meet to assuage investors confidence. It touched upon certain key points including (1) Structure of NHAI, with the authority being an extended arm of the Govt. for highway project implementation, thus enjoying a near sovereign status (2) Inherent Toll/ToT/InvIT revenue model makes case for debt servicing & (3) Ordering likely to resume from Nov-19.

We spoke with V K Sharma CGM (Land Acquisition) and Siba Narayan Nayak, CGM (Finance) of NHAI, for an update on land acquisition and order award targets for FY20.

High frequency indicators exhibited a mixed trend in Jul'19.

Top Picks: Larsen, PNC, Ashoka, KNR & HG. Top Picks Buildings: Capacite, Ahluwalia. Union budget retained Infra spends: Union budget was not very different from the Interim budget and largely all FY20E spending estimates on Roads, Railways, MRTS etc were retained. We do remain concerned w.r.t the funding scenario at NHAI as a Rs 1/litre increase in fuel cess (~Rs 120bn annually) is precious too little to assuage the shortfall. States infra spending may supplement the shortfall at NHAI/MORTH.

Recommendation: The auto index underperformed the broader market due to the weak demand environment and the recent announcements in the budget to promote Electric vehicles (OEMs will be compelled to accelerate the launch of EVs). We have a SELL on Eicher Motors given the sharp slowdown in the lifestyle biking segment. We recommend reducing positions in Ashok Leyland (Neutral) in the event of a stock price rally and buying Container Corporation of India, which will benefit from the upcoming Dedicated Freight Corridor. The persistent weakness in auto volumes in 1QFY20 was due to (1) Moderation in economic activity in an election quarter (2) Ongoing tight liquidity conditions due to the NBFC issue (3) Late arrival of monsoons (4) A demanding base effect. The logistics company CONCOR also reported flattish volumes in 1QFY20.

After a modest Mar'19 quarter, Q1FY20 is also expected to be sluggish for our logistics coverage universe as key economic indicators remain subdued. Median revenue growth for our coverage stocks is estimated at 10.9% YoY in Q1 vs. 15% in FY19. We expect TCIEXP/TRPC to outperform with PAT growth of 23%/14% YoY, while others are likely to record <12% YoY growth. The impact of new lease accounting norms (Ind-AS 116) on reported financials...