The Great Indian Revival. 5 Stocks to Play this Multi-Decade Build Out of India

The Indian economy is in a state of revival.

The government is implementing its plans to stimulate growth through infrastructure development, accelerated industrialisation, and stronger foreign direct investment (FDI) inflows. The country is on its way to becoming a force to reckon with.

For instance, the government has an ambitious target of achieving a construction rate of 60 km per day.

This is evidence that an infrastructure boom is upon us.

Besides core infrastructure stocks, allied industries such as real estate, power, engineering, and transportation will also gain from the increased public spending.

Here are five stocks to watch out for as this multi decade build out plays out.

#1 Larsen & Toubro (L&T)

First on the list is L&T.

The company dominates India's engineering, procurement, and construction (EPC) projects market. With its ability to cater to several sectors and marquee projects across geographies, L&T has established a track record of more than seven decades.

L&T is the perfect proxy for India's infrastructure story as private capex and infrastructure investments will be instrumental for the revival of economy and corporate earnings.

L&T has a dominant position in the infrastructure space as it judiciously bidding for projects across segments such as infrastructure (power, roads), urban infrastructure, defence manufacturing, and nuclear.

In October 2020, it bagged a Rs 250 bn order for the largest section of the Mumbai-Ahmedabad Bullet Train Project.

In November 2020, it bagged a Rs 30 bn contract to construct India's longest road bridge across river Brahmaputra, connecting Assam to Meghalaya.

Add to this Mumbai's Coastal Road Project and the Navi Mumbai international airport. And more recently, the Chennai Metro Rail Project.

As a result, L&T has a strong order book. Its order book for the financial year 2022-23 stood at Rs 8.5 tn. The company bagged orders worth Rs 418 bn during the June 2022 quarter as well. International orders comprised 43% of the total order inflow.

Besides this, L&T also has a lean balance sheet. The consistency in its return ratios (average ROE of 16%) over the past decade also inspires confidence.

To know more about L&T, check out the company's factsheet.

#2 Tata Power

Second on the list is Tata Power.

Tata Power is an Indian electric utility company. The core business of the company is to generate, transmit, and distribute electricity.

As energy is the most important input for economic development, it's no surprise that Tata Power is on this list.

Besides, with the government's push towards renewable energy, it's well-positioned to respond to this shifting landscape.

Tata Power is one of India's leading players in the renewable energy space with renewable power capacity of 2.6 gigawatt (GW) in 11 states. The company is planning to take its renewable production to massive 15 GW by 2025.

It's a front-runner across the renewable spectrum through its subsidiaries, Tata Power Renewable Energy, Tata Power Solar Systems (TPSSL), and Walwhan Renewable Energy (WREL).

Apart from renewable energy, Tata Power is acing the electric vehicle (EV) race. The company has partnered with Tata Motors, TVS, MG Motor India, and Jaguar Land Rover (JLR) India, to develop EV charging infrastructure.

It leads the electric vehicle charging station pack with over 1,300 charging stations under its umbrella. It plans to become the leader with over 1 lakh chargers installed by 2026.

The company is also setting up a 4 GW solar cell and module manufacturing capacity in Tamil Nadu with an investment of Rs 30 bn.

It enjoys a healthy solar EPC (Engineering, Procurement, and Construction) order book of Rs 130 bn.

With the solar sector projected to grow by 10x over the next five years, this segment can become a predominant source of revenue for the company.

Currently, Tata Power has a net debt to equity of 2.3x. However, the current interest coverage ratio is low at 1.6x.

But considering the company is a part of the cash-rich Tata group, funding this new era of growth should not be a concern. The company can either raise more debt or sell more equity to investors across the globe.

To know more, check out Tata Power's factsheet.

#3 Cochin Shipyard

Third on the list is Cochin Shipyard.

The company is the largest shipbuilding and maintenance facility in India. It builds platform supply vessels and double-hulled oil tankers.

Cochin Shipyard is a unique player to ride the potential in India's defence manufacturing space. Its towering performance in a difficult sector lends it fundamental merit.

Now why is the defence sector important in the Great Indian Revival?

You see, until recently, India was the largest arms importer in the world, dependent on countries like France, Israel, US, and Russia to meet its need for critical military systems.

However, with geopolitical tensions simmering across the world, the government is focused on reducing its dependency on imports for the past few years with the help of initiatives like 'Make in India' and 'Atmanirbhar Bharat'.

Through these initiatives, India will improve its defence manufacturing sector and become self-reliant to face threats from its rivals.

Cochin Shipyard stands to benefit immensely from this shift.

Even though it's registered as a commercial shipyard, it derives 80% of its revenues from building and repairing defence ships. It derives the remaining 20% from commercial shipbuilding and ship repair.

Some of its clients include the Indian Navy, Shipping Corporation of India, Indian Coast Guard, and National Petroleum Construction Company (Abu Dhabi).

It has a strong order book and has Rs 100 bn worth of orders from the Indian Navy. The company also has secured orders from European and Middle East companies.

Cochin Shipyard has also partnered with Dredging Corporation of India and IHC Holland to develop India's biggest hopper dredger of 12,000 cubic meters with best-in-class global technology.

Due to the pandemic, the company's revenues have grown only marginally in the last three years. The net profit grew at a CAGR of 7%, mainly due to growth in the repair business.

A strong order book coupled with a diversified revenue stream indicates revenue visibility in the medium term.

To know more, check out Cochin Shipyard's factsheet.

#4 Indraprastha Gas (IGL)

Fourth on the list is Indraprastha Gas.

The company is one of the pioneers and leading City Gas Distribution (CGD) company in India catering to more than 1.1 m CNG vehicles, 1.4 m domestic PNG customers, and over 5,500 commercial & industrial customers across the country.

With India's domestic gas demand at an inflection point, Indraprastha gas is poised to gain immensely.

You see, the government has been pushing investments in gas pipeline infrastructure. But it's the demand for gas from households, factories and the auto industry that is set to take a leap.

From June to December 2020, the six months following Covid-19 lockdown, natural gas was the only fuel to show double digit (12% YoY) growth in demand. It's expected to see a 66% volume growth over the next five years.

A bulk of this demand will be led by city gas distributors such as Indraprastha Gas who are bidding for licenses in new geographic circles every year.

Plans are in pipeline for backward integration through setting up of gas meter manufacturing unit in India.

It's also considering to leverage its expertise and execution capabilities by way of providing consultancy services for setting up of CGD projects.

Besides this, IGL is planning to promote usage of gas in home appliances and further start mobile CNG dispensing facilities and charging facilities for e-vehicles.

The company in association with Indian Oil Corporation is planning to set up H-CNG station as a pilot project at Rajghat for DTC buses and such project is first of its kind in the country.

Indraprastha Gas has healthy return ratios with RoE and RoCE at 20.9% and 27% respectively. The company also has very little to no debt on its books.

To know more, check out Indraprastha Gas factsheet.

#5 Bharti Airtel

Last on the list is a company with an enviable startup portfolio - Bharti Airtel.

The company is one of the leading providers of telecommunication services in India and is expected to be at the forefront of commercial 5G launch.

Why is 5G relevant in the context of the Great Indian Revival?

Perseverance in technological innovation will contribute to economic growth and will continue to drive prosperity in a post pandemic era. 5G is vital to this evolution.

Bharti Airtel has paid Rs 83 bn to the Department of Telecommunications (DoT) towards dues for spectrum acquired in the recently concluded 5G auctions.

Airtel has taken up the option to pay more upfront amount as against 20 equal annual instalments, paying four years of the 2022 spectrum dues upfront.

The company has rolled out '5G for Business' initiative to demonstrate a wide range of enterprise grade use cases using high speed & low latency networks.

As part of '5G for Business', Airtel said it will join forces with leading global consulting and technology companies such as Accenture, AWS, and TCS along with industry leading brands such as Apollo Hospitals, Flipkart to test 5G based solutions.

Earlier this year, the telco demonstrated India's first 5G experience over a live 4G network. It has also demonstrated India's first rural 5G trial as well as the first cloud gaming experience on 5G.

As companies are focusing on shaping and growing their ecosystem to accelerate their digital transformation, India has emerged as the largest and fastest-growing market of digital consumers.

Airtel is well placed to ride this trend. However, the company has a high debt to equity ratio of 2.55x. It has also delivered poor sales growth over the last 5 years.

To know more, check out Bharti Airtel's factsheet.

To conclude

The Union Budget this year had a focus on consolidation with a thrust on infrastructure where the Government will do the heavy lifting and the private sector will step in to play its part.

Most of the initiatives undertaken, ranging from NIP (National Infrastructure Pipeline) to NMP (National Monetisation Pipeline), creation of DFI (Development Finance Institution), the PLI (Production Linked Incentive) scheme, as well as the renewed PPP (public private partnerships) models, have an overarching focus on growth.

While this will take almost a decade to play out, one can be sure that it will transform India as we know it.

A reasonably stable domestic macro environment and an equable socio-economic climate should be able to further help the Government realise its vision.

Public and private investments working in tandem should also resuscitate India's Investment/GDP ratio which has been stagnant.

Since infrastructure investments serve the dual purpose of driving productivity and generating employment, the underlying macro drivers for growth remain intact.

However, how this pans out remains to be seen. Stay tuned for more updates from this space.

In the meantime, do check out the below video where we discuss how to turn India's Revival into an opportunity over the long term.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...