Why Nuvama is cautious on infra stocks

Nuvama Institutional Equities has released a report detailing the performance and outlook of 14 infrastructure companies. The report highlights a 4 per cent year-on-year (YoY) contraction in the aggregate top line for Q4FY25, attributed to an eroding executable order book and payment issues. The average EBITDA margin fell 80 basis points (bp) YoY to 10.3 per cent.

Despite these challenges, the average profit after tax (PAT) margin improved to 6 per cent due to higher distribution from InViT to G R Infra. Nuvama said order inflow increased, raising the book-to-bill ratio to 3x, excluding NBCC. However, the road awards remained tepid for a second consecutive year, with no increased budget outlay for roads and railways in FY26.

Nuvama has a cautious stance on the infrastructure sector given the muted capital expenditure growth. Ahluwalia Contracts is identified as a top pick amidst these challenges. The report also notes the soft execution in the sector, where revenues for the top 14 construction companies decreased 4 per cent YoY in Q4FY25.

Road EPC companies faced a significant impact with a 15 per cent YoY decline in top-line performance. In contrast, urban infrastructure players and NBCC limited the overall decline. Excluding G R Infra, the sector's PAT margin decreased 50 basis points YoY to 5.2 per cent.

The report also observes a decline in return ratios, with average return on equity (RoE) falling to 14.4 per cent in FY25 from 16.2 per cent in FY24. The return on capital employed (RoCE) also decreased to 19.9 per cent from 21.4 per cent the previous year.

In the wagon segment, revenues for the listed players rose 2 per cent YoY in Q4FY25, with an 18 per cent YoY increase for FY25. The EBITDA margin improved to 11.5 per cent, and the total wagons dispatched increased by 14.5 per cent YoY, reaching 26,832 units.

Despite falling revenues and margins, leverage (excluding NBCC) remained flat YoY at the end of FY25. However, the working capital cycle deteriorated, with debtor days increasing from 80 to 96, impacting the financial health of companies.

The latter half of FY25 saw a surge in order inflow, improving the book-to-bill ratio from 2.2x to 3x by year-end. Notably, NBCC, NCC, and Afcons experienced robust order accretion, indicating potential growth opportunities for these companies.