Despite impressive revenue growth of 76.71% year-on-year to ₹1,001.55 crores in Q2 FY26, the company faces mounting concerns over its escalating debt burden and deteriorating interest coverage ratios. With interest expenses surging 67.73% in the first half of FY26 and operating profit to interest coverage dropping to a concerning 1.76 times, investors are questioning the sustainability of the trust's growth trajectory against a backdrop of elevated leverage and compressed profitability margins.
The infrastructure investment trust's operational performance reflects the dual nature of India's highway monetisation programme—robust toll collections driving revenue expansion, yet constrained by the capital-intensive nature of infrastructure assets and the associated debt servicing obligations. The trust's operating margin of 79.87% in Q2 FY26, whilst remaining healthy in absolute terms, represents a sequential compression from the previous quarter's 81.49%, signalling potential pressure on operational efficiency.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | Operating Margin |
|---|---|---|---|---|---|
| Sep'25 | 1,001.55 | -2.07% | 112.09 | -7.72% | 79.87% |
| Jun'25 | 1,022.75 | +58.08% | 121.47 | -13.55% | 81.49% |
| Mar'25 | 646.98 | +10.31% | 140.51 | +205.66% | 86.07% |
| Dec'24 | 586.50 | +3.48% | 45.97 | -38.30% | 86.42% |
| Sep'24 | 566.77 | +0.57% | 74.50 | +16.35% | 80.79% |
| Jun'24 | 563.56 | +134.26% | 64.03 | -2.59% | 80.93% |
| Mar'24 | 240.57 | — | 65.73 | — | 78.24% |
Financial Performance: Growth Trajectory Encounters Headwinds
National Highways Infra Trust's Q2 FY26 financial performance presents a paradox of robust top-line expansion tempered by deteriorating bottom-line metrics. Net sales of ₹1,001.55 crores in Q2 FY26 represent a commendable 76.71% year-on-year growth, driven by increased toll collections from the trust's portfolio of highway assets. However, the 2.07% sequential decline from Q1 FY26's ₹1,022.75 crores suggests a moderation in the growth momentum, potentially attributable to seasonal traffic variations or normalisation following the exceptional Q1 performance.
The trust's net profit of ₹112.09 crores in Q2 FY26, whilst demonstrating healthy 50.46% year-on-year growth, declined 7.72% sequentially from the previous quarter's ₹121.47 crores. This divergence between revenue and profit trends underscores the mounting pressure from escalating interest expenses, which surged to ₹454.06 crores in Q2 FY26. On a half-yearly basis for H1 FY26, interest expenses totalled ₹908.41 crores, representing a concerning 67.73% increase compared to the corresponding period in FY25.
The trust's operating margin of 79.87% in Q2 FY26, whilst remaining robust in absolute terms, reflects a sequential compression of 162 basis points from Q1 FY26's 81.49%. More concerning is the PAT margin contraction to 11.19% in Q2 FY26 from 11.88% in the previous quarter, highlighting the strain from elevated interest costs on overall profitability. The gross profit margin similarly declined to 35.76% in Q2 FY26 from 37.96% in Q1 FY26, indicating mounting pressure on the trust's ability to convert revenue into bottom-line profits.
The quality of earnings presents additional concerns, with depreciation expenses of ₹330.67 crores in Q2 FY26 representing a significant non-cash charge against profitability. The trust's profit before tax of just ₹27.49 crores in Q2 FY26, down from ₹30.63 crores in the previous quarter, underscores the limited operational cushion available after servicing debt obligations. Notably, the trust benefited from a tax credit of ₹84.60 crores in Q2 FY26, without which the reported net profit would have been substantially lower, raising questions about the sustainability of earnings quality going forward.
The Debt Burden: Leverage Reaches Concerning Levels
National Highways Infra Trust's balance sheet reveals a capital structure under considerable strain, with long-term debt reaching ₹21,471.50 crores as of March 2025, representing an 84.63% increase from the previous year's ₹11,633.95 crores. This aggressive debt accumulation, whilst facilitating asset acquisitions and portfolio expansion, has pushed the trust's debt-to-equity ratio to 1.01 times in H1 FY26—the highest level in its operational history and a clear red flag for investors concerned about financial flexibility.
The trust's interest coverage ratio, measured by operating profit to interest, deteriorated to a worrying 1.76 times in Q2 FY26, representing the lowest level on record. This metric indicates that the trust generates just ₹1.76 of operating profit for every rupee of interest expense, leaving minimal buffer for unexpected operational challenges or interest rate volatility. The average EBIT to interest ratio of 1.39 times over the measurement period further confirms the precarious nature of the trust's debt servicing capability.
Critical Leverage Concerns
Debt-to-EBITDA Ratio: At 8.05 times, the trust's debt burden is exceptionally high relative to its earnings generation capacity, significantly above prudent levels for infrastructure assets.
Interest Coverage: Operating profit to interest coverage of 1.76 times in Q2 FY26 represents the lowest level recorded, indicating minimal cushion for debt servicing.
Rising Interest Burden: Interest expenses of ₹908.41 crores in H1 FY26 grew 67.73% year-on-year, substantially outpacing revenue growth and compressing profitability.
The trust's net debt-to-equity ratio of 0.98 times, whilst appearing more moderate due to cash holdings of ₹465 crores as of March 2025, still reflects substantial leverage. With shareholder funds of ₹21,973.28 crores as of March 2025 supporting total assets of ₹44,904.20 crores, the trust's equity base has been diluted through aggressive borrowing, limiting financial flexibility for future growth initiatives or unexpected operational challenges.
From a cash flow perspective, the trust generated operating cash flow of ₹2,098.67 crores in FY25, the highest level on record and a positive indicator of underlying operational health. However, this was entirely consumed by investing activities of ₹18,309 crores during the same period, necessitating substantial cash inflows from financing activities of ₹16,212 crores. This pattern underscores the trust's dependence on continuous debt funding to support its asset acquisition and expansion strategy, raising questions about long-term sustainability.
Capital Efficiency: Weak Returns Signal Management Challenges
National Highways Infra Trust's capital efficiency metrics paint a concerning picture of management effectiveness and asset utilisation. The trust's average return on equity (ROE) of 2.62% ranks amongst the weakest in the infrastructure sector, indicating that the trust generates just ₹2.62 of profit for every ₹100 of shareholder capital employed. The latest ROE of 1.95% represents a further deterioration, suggesting declining capital productivity despite aggressive asset expansion.
The trust's return on capital employed (ROCE) of 3.74% similarly reflects suboptimal utilisation of invested capital. This metric, which measures the return generated on total capital deployed including both equity and debt, indicates that the trust's highway assets are generating returns barely above the risk-free rate, calling into question the economic viability of recent acquisitions and the pricing discipline exercised in asset selection.
Management Efficiency Concerns
The trust's weak capital efficiency metrics—ROE of 1.95% and ROCE of 3.74%—reflect the capital-intensive nature of infrastructure assets and potentially aggressive acquisition pricing. With sales-to-capital employed ratio of just 0.08 times, the trust requires ₹12.50 of capital investment to generate every rupee of revenue, highlighting the long gestation periods and modest returns characteristic of highway assets. These metrics suggest that management may be prioritising asset accumulation over return optimisation, a strategy that benefits from scale but challenges profitability in the near term.
Industry Leadership: How National Highways Infra Trust Compares to Peers
Within the construction and infrastructure sector, National Highways Infra Trust occupies a unique position as an infrastructure investment trust rather than a traditional construction company, making direct peer comparisons challenging. Nevertheless, examining the trust against infrastructure-focused peers reveals significant valuation and operational disparities that merit investor attention.
| Company | P/E (TTM) | P/BV | Div Yield | Debt/Equity |
|---|---|---|---|---|
| National Highways Infra Trust | 66.40x | 1.30x | 3.02% | 0.98x |
| Larsen & Toubro | 34.30x | 5.43x | 0.85% | 0.70x |
| Rail Vikas Nigam | 58.97x | 7.01x | 0.53% | 0.32x |
| NBCC (India) | 46.23x | 11.60x | 0.77% | -1.89x |
| IRB Infrastructure Developers | 30.44x | 1.31x | 0.54% | 0.90x |
| IRB InvIT Fund | NA (Loss Making) | 1.72x | NA | 1.42x |
National Highways Infra Trust trades at a P/E multiple of 66.40 times trailing twelve-month earnings, representing a substantial premium to most infrastructure peers and the second-highest valuation in the peer group after Rail Vikas Nigam. This elevated multiple appears difficult to justify given the trust's weak ROE of 2.62%, which trails significantly behind peers such as NBCC's 21.71%, Rail Vikas Nigam's 16.89%, and Larsen & Toubro's 13.88%.
The trust's price-to-book value ratio of 1.30 times, whilst appearing reasonable in absolute terms, must be contextualised against its anaemic return on equity. With an ROE of just 2.62%, the trust is trading at a premium to book value despite generating returns well below the cost of equity, suggesting potential overvaluation relative to intrinsic worth. In contrast, IRB Infrastructure Developers trades at a similar P/BV of 1.31 times but generates superior ROE of 4.34%, offering better value for investors.
The trust's primary competitive advantage lies in its dividend yield of 3.02%, which significantly exceeds the peer group average and provides income-focused investors with an attractive yield proposition. The latest dividend of ₹2.67 per share, paid with an ex-dividend date of November 18, 2025, underscores the trust's commitment to regular income distribution, a characteristic valued by InvIT investors seeking stable cash flows from infrastructure assets.
Valuation Analysis: Premium Pricing Difficult to Justify
National Highways Infra Trust's current valuation metrics suggest the stock is trading at a substantial premium to its intrinsic value, with multiple indicators pointing towards overvaluation relative to fundamentals. The trust's P/E ratio of 66.40 times trailing earnings represents a significant premium to both the broader market and infrastructure peers, particularly concerning given the modest growth trajectory and weak capital efficiency metrics.
The trust's PEG ratio of 21.90 times—calculated by dividing the P/E ratio by the earnings growth rate—indicates severe overvaluation relative to growth prospects. A PEG ratio above 2.0 typically signals overvaluation, whilst the trust's reading of 21.90 suggests investors are paying nearly 22 times the growth rate for each unit of earnings, an unsustainable premium by any reasonable valuation framework.
The trust's enterprise value multiples further confirm the overvaluation assessment. With EV-to-EBITDA of 18.12 times and EV-to-EBIT of 30.77 times, the trust commands premium valuations typically reserved for high-growth technology companies rather than infrastructure assets with modest single-digit returns on capital. The EV-to-sales multiple of 15.00 times similarly appears elevated, particularly given the capital-intensive nature of the business and limited operating leverage.
The trust's overall valuation grade of "Very Expensive" by proprietary assessment frameworks reflects these concerns, with the grade having remained in expensive territory since April 2023. Historical valuation grade transitions—from "Very Expensive" to "Risky" and back—suggest persistent overvaluation concerns that have plagued the stock for an extended period, limiting upside potential for new investors entering at current levels.
"At 66 times earnings and 22 times the growth rate, National Highways Infra Trust is priced for perfection in a business model characterised by modest returns, high leverage, and limited growth visibility."
Shareholding Pattern: Institutional Confidence Remains Robust
National Highways Infra Trust's shareholding pattern reveals strong institutional participation, with 81.05% of shares held by institutional investors as of June 2025. This high institutional ownership reflects confidence in the trust's underlying asset quality and cash flow generation potential, despite concerns about leverage and valuation.
| Shareholder Category | Jun'25 | Mar'25 | Dec'24 | QoQ Change |
|---|---|---|---|---|
| Promoter | 11.07% | 15.32% | 15.48% | -4.25% |
| Mutual Funds | 3.51% | 3.93% | 9.88% | -0.42% |
| Insurance Companies | 4.89% | 3.01% | 4.10% | +1.88% |
| Other DII | 72.65% | 70.29% | 62.47% | +2.36% |
| Non-Institutional | 7.88% | 7.53% | 8.07% | +0.35% |
The most significant development in recent shareholding patterns has been the decline in promoter holding from 15.32% in March 2025 to 11.07% in June 2025, representing a 4.25 percentage point reduction. This substantial stake sale by the National Highways Authority of India (NHAI), the trust's sponsor, may signal either a monetisation opportunity at elevated valuations or a rebalancing of the government's portfolio exposure. Whilst not necessarily negative, the timing of this reduction warrants monitoring given current valuation concerns.
Mutual fund holdings declined from 3.93% in March 2025 to 3.51% in June 2025, continuing a downward trend from 9.88% in December 2024. This sustained reduction in mutual fund participation suggests professional money managers may be taking profits at current elevated valuations or reallocating capital to more attractively valued infrastructure opportunities. The 5.95 percentage point decline from March to June represents a particularly sharp reduction worthy of investor attention.
Offsetting these declines, holdings by other domestic institutional investors (DII) increased from 70.29% in March 2025 to 72.65% in June 2025, reflecting continued appetite from pension funds, provident funds, and other long-term institutional investors attracted by the trust's stable cash flows and dividend yield. Insurance company holdings similarly increased from 3.01% to 4.89%, indicating growing interest from insurance portfolios seeking yield-generating infrastructure assets.
Stock Performance: Modest Returns Lag Sector Peers
National Highways Infra Trust's stock performance over various timeframes reveals a pattern of modest positive returns that have generally kept pace with broader market indices but significantly underperformed the infrastructure and construction sector. Trading at ₹144.90 as of November 19, 2025, the stock has delivered a one-year return of 10.61%, marginally ahead of the Sensex's 9.81% return over the same period.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +1.33% | +0.85% | +0.48% |
| 1 Month | +2.04% | +1.47% | +0.57% |
| 3 Months | +6.54% | +4.34% | +2.20% |
| 6 Months | +8.34% | +3.81% | +4.53% |
| YTD | +9.77% | +9.02% | +0.75% |
| 1 Year | +10.61% | +9.81% | +0.80% |
| 2 Years | +20.95% | +29.47% | -8.52% |
The stock's short-term performance has been relatively robust, with gains of 1.33% over the past week, 2.04% over one month, and 6.54% over three months, all generating positive alpha versus the Sensex. The six-month return of 8.34% represents particularly strong outperformance, with alpha of 4.53 percentage points suggesting improving investor sentiment towards infrastructure assets in recent months.
However, the two-year performance reveals a different picture, with the stock delivering returns of 20.95% compared to the Sensex's 29.47%, generating negative alpha of 8.52 percentage points. This underperformance over longer timeframes suggests that whilst the stock has benefited from recent momentum, fundamental concerns about valuation, leverage, and capital efficiency have constrained returns for longer-term holders.
Most concerning is the stock's substantial underperformance relative to the construction sector, which declined 20.78% over the past year whilst National Highways Infra Trust gained 10.61%. This 31.39 percentage point outperformance versus the sector reflects the trust's defensive characteristics and yield appeal, but also highlights the challenging operating environment facing traditional construction companies that may eventually impact infrastructure trusts through reduced asset acquisition opportunities.
From a risk perspective, the stock exhibits volatility of 8.10% with a beta of 1.35, indicating higher volatility than the broader market. The positive Sharpe ratio and classification as "LOW RISK MEDIUM RETURN" suggest that the stock's returns have been reasonable relative to the risk undertaken, though the elevated beta indicates amplified sensitivity to market movements that may concern conservative investors.
Investment Thesis: Yield Appeal Versus Fundamental Concerns
National Highways Infra Trust presents investors with a classic investment dilemma—attractive dividend yield and stable cash flows from toll road assets versus elevated valuation, mounting leverage, and weak capital efficiency. The trust's investment proposition rests primarily on its 3.02% dividend yield and exposure to India's highway infrastructure build-out, factors that appeal to income-focused investors seeking alternatives to fixed-income securities in a declining interest rate environment.
The trust's quality grade of "Average" reflects its long-term sales growth of 92.03% and EBIT growth of 86.63%, impressive figures that demonstrate the rapid scaling of the asset base. However, this growth has come at the cost of elevated leverage, with debt-to-EBITDA of 8.05 times and interest coverage of just 1.76 times raising questions about financial sustainability. The trust's weak ROCE of 3.74% and ROE of 2.62% further underscore concerns about capital productivity and management efficiency.
The positive financial trend designation reflects improving operational metrics, including highest-ever operating cash flow of ₹2,098.67 crores in FY25 and net sales growth of 41.90% in Q2 FY26 versus the previous four-quarter average. However, this positive assessment is tempered by concerning trends in interest expense growth (67.73% in H1 FY26), deteriorating debt-equity ratio (1.01 times), and declining operating profit to interest coverage, all of which suggest mounting financial stress beneath the surface.
Key Strengths & Risk Factors
Key Strengths
- Attractive Dividend Yield: 3.02% yield provides compelling income proposition for yield-focused investors, significantly exceeding peer group averages
- Robust Revenue Growth: 76.71% year-on-year sales growth in Q2 FY26 demonstrates strong toll collection momentum from expanding asset base
- High Operating Margins: Operating margin of 79.87% reflects the high-margin nature of toll collection business with limited variable costs
- Strong Institutional Support: 81.05% institutional holdings indicate confidence from sophisticated investors in underlying asset quality
- Healthy Operating Cash Flow: ₹2,098.67 crores operating cash flow in FY25 demonstrates strong cash generation from operational assets
- Government Backing: NHAI sponsorship provides implicit government support and access to quality highway assets
- Zero Promoter Pledging: No pledged shares indicates financial stability at the sponsor level
Key Risk Factors
- Elevated Leverage: Debt-to-equity of 1.01 times and debt-to-EBITDA of 8.05 times represent concerning leverage levels that constrain financial flexibility
- Weak Interest Coverage: Operating profit to interest ratio of 1.76 times provides minimal cushion for debt servicing obligations
- Poor Capital Efficiency: ROE of 2.62% and ROCE of 3.74% indicate suboptimal returns on invested capital
- Expensive Valuation: P/E of 66.40 times and PEG ratio of 21.90 times suggest significant overvaluation relative to growth and profitability
- Rising Interest Burden: 67.73% growth in interest expenses in H1 FY26 substantially outpaces revenue growth
- Declining Promoter Stake: 4.25 percentage point reduction in promoter holding in Q1 FY26 may signal concerns about valuation sustainability
- Margin Compression: Sequential decline in operating margin from 81.49% to 79.87% suggests potential pressure on operational efficiency
Outlook: What to Watch
Positive Catalysts
- Traffic Growth: Sustained increase in vehicle traffic on toll roads driving organic revenue growth
- New Asset Acquisitions: Addition of quality highway assets from NHAI pipeline expanding revenue base
- Toll Rate Revisions: Periodic toll rate increases providing pricing power and inflation protection
- Debt Refinancing: Successful refinancing at lower interest rates reducing debt servicing burden
- Improved Interest Coverage: Stabilisation or improvement in operating profit to interest ratio above 2.0 times
Red Flags to Monitor
- Further Leverage Increase: Debt-to-equity rising above 1.1 times would signal concerning financial stress
- Interest Coverage Deterioration: Operating profit to interest falling below 1.5 times would be critically concerning
- Margin Compression: Operating margins declining below 75% would indicate operational challenges
- Institutional Selling: Continued reduction in mutual fund or insurance holdings signalling valuation concerns
- Dividend Cut: Any reduction in dividend payout would undermine core investment thesis for yield investors
The Verdict: Hold for Yield, Avoid for Growth
Score: 50/100
For Fresh Investors: Not recommended for fresh purchases at current valuations. The trust's P/E of 66.40 times and PEG ratio of 21.90 times indicate significant overvaluation relative to modest growth prospects and weak capital efficiency. Whilst the 3.02% dividend yield offers appeal for income investors, the elevated leverage (debt-to-equity of 1.01 times) and weak interest coverage (1.76 times) present material risks that are inadequately compensated by current valuations. Fresh investors should await a meaningful correction of 15-20% before considering entry.
For Existing Holders: Continue to hold for dividend income but remain vigilant about leverage trends and interest coverage metrics. The trust's stable cash flows and government backing provide downside protection, whilst the attractive dividend yield justifies continued holding for income-focused portfolios. However, consider trimming positions on any rally towards ₹155-160 levels, as fundamental concerns about capital efficiency and leverage sustainability limit meaningful upside potential from current levels.
Fair Value Estimate: ₹125 (13.74% downside from current price of ₹144.90)
Note— ROCE = (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. The views expressed are based on data available as of November 21, 2025, and are subject to change based on market conditions and company developments.
