Why have infra stocks missed the recent rally? - Views on News from Equitymaster

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Why have infra stocks missed the recent rally?

Sep 9, 2010

Indian stock markets have been scaling highs in the recent past. However, infrastructure sector as a whole has remained an underperformer in this rally. And the reasons are obvious. Apart from the dismal first quarter performance (muted top line growth) execution worries due to company/project specific issues have had a negative impact on the stock prices. A look the chart below reveals the extent of underperformance of major construction companies.

Construction companies lagging the Index
IVRI: Returns in last 3 months

However, we believe that the execution risk has already been built into the stock prices and we do not see a major downside from current levels. The execution trend is expected to pick up momentum in 2HFY11 on the back of strong order inflows. It should be noted that right now, the book to bill ratios of majority of the construction companies are at an all time high. This is mainly due to best ever order inflow recorded till date in the last quarter.

So we believe it's just a matter of execution before the benefits start being visible in the top line. Further, it is interesting to note that despite poor show in 1QFY11, the management of various companies have maintained their guidance for the full year. It is an encouraging sign to say the least. Again second half being seasonally strong period, we believe achieving or exceeding the guidance should not be difficult.

However, considering the recent price performance we believe the markets are not factoring in the benefits about to accrue in the second half of the year. Now, considering the opportunity on hand in the Indian infrastructure space, we believe the nature and extent of underperformance to the benchmark index is unjustified. On a conservative side, even if we assume the underperformance to narrow by a miniscule extent, construction companies would still leave something for the investors on the table.

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