Will the sun rise again on infra stocks? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Will the sun rise again on infra stocks?

Dec 3, 2011

When we compare ourselves with our Chinese neighbours, one of the main differentiating factors is often the quality of infrastructure. Such is the poor state of India's infrastructure, that we lose an estimated 2% of GDP (Gross Domestic Product) growth because of it. Currently, the condition of infrastructure companies is akin to the state of India's infrastructure. While the Indian stock markets have been severely battered in recent times, the infrastructure stocks has been the worst hit.

You would recall that the once sunrise sector of India, had everything going for it until 2007. After decades of wobbly growth, the Indian economy had reached an inflection point and was set to grow at a robust pace. The government chalked out big plans like providing electricity for all, building 20 km of roads per day and so on. Infrastructure companies plunged in to grab this golden opportunity. They did very well for quite some time. But then, as fate would have it, both reality and adversity struck and everyone realised that the story was not going to be as hunky-dory as imagined.

The sector has been getting everything wrong for quite some time. The second quarter ended September, 2011 (2QFY12) saw the infrastructure players posting dismal numbers. Most companies reported significant year-on-year decline in profit after tax (PAT). The poor show was attributable to a steep incline in interest costs, which escalated in the range of 200 to 500 basis points (2 to 5%). One reason for this was the slew of hikes in key lending rates by the Reserve Bank of India (RBI) to battle steep inflation rates. The other reason was the high debt burden coupled with a significant increase in working capital requirement. But this is just one part of the story. The other concerns plaguing the sector include regulatory hurdles, land acquisition problems, delays in project execution and such other structural bottlenecks.

So there is no denying that there are ample reasons for the negativity surrounding the infrastructure sector. But we believe that in times of panic, investors have a tendency to be shortsighted. The reactions at such times are often extreme and disproportionate to what the events call for. Such is situation of infrastructure stocks currently, with many of them trading below their book value.

Company Returns* (P/BV)^
NCC -76% 0.37
IVRCL -75% 0.32
GVK Power -75% 0.47
GMR Infra -57% 1.02
HCC -56% 1.08
JP Associates -44% 1.20
IRB Infra -37% 1.98
Data Source: Ace Equity, Outlook Profit
*Returns calculated from 1st January to 25th November, 2011; ^Price to Book Value

What should value investors do? With the overall pessimism over infrastructure stocks, it may be a good time to go bargain hunting. It is important to note that the fate of the infra stocks is not going to turnaround overnight. Infra companies are very sensitive to interest rates. While it may seem that interest rates in India have peaked, it is anybody's guess as to when the Reserve Bank of India (RBI) would cut down the rates. On the other hand, the order pipeline has slowed down. Several companies have hit regulatory roadblocks. Project execution has slowed down. All this has weighed heavily on their balance sheets. There are chances that some of these players may face further distress and deterioration. But when the cycle turns, the better-off players would be in a good position to capture the opportunity. Within the infrastructure space, infrastructure developers have not been hit as badly as the EPC (Engineering, Procurement & Construction) players. In recent months, the road sector has witnessed some improvement in order inflows.

In conclusion, the infrastructure sector is likely to report poor performance for at least a year or two. We suggest value investors keep a watch on this sector. Some patience coupled with some well-informed investment decisions are quite likely to pay off well in the long term.


Equitymaster requests your view! Post a comment on "Will the sun rise again on infra stocks?". Click here!

2 Responses to "Will the sun rise again on infra stocks?"

Ramanand

Dec 5, 2011

Well said @Sundar. India definitely needs infrastructure, but question is whether it can get the infrastructure at a price it can afford. The second important question is whether we can productively use that infrastructure once it becomes available. For example, we built the Konkan railway at significant cost, but it remains shut during the monsoons simply because of environmental problems of running a rail service in such a region.
Similarly, you can't create roads that are wide and smooth, but not engineered for high speed driving (i.e. no proper road banking on curves, no proper lane merging, no proper overhead passes for smooth traffic flow). Such mistakes will result in a depreciated value for all stakeholders.

Like 

Sundar

Dec 3, 2011

Everything is boiling to affordability of average indian consumer to pay for the project cost and profits they are looking at. All the reasons you had put above like interest costs, regulatory etc etc are superfecial. All the costs in Power projects (technology, fuel etc) are international whereas payout from public is Indian earnings. Companies should look this very seriously.

Like 
  
Equitymaster requests your view! Post a comment on "Will the sun rise again on infra stocks?". Click here!

More Views on News

Mindspace Business Parks REIT IPO - Should You Apply? (IPO)

Jul 27, 2020

Should you apply for the IPO of Mindspace Business Parks REIT?

How Modi's Affordable Housing Focus is a Real Game Changer for the Economy (Views On News)

Jul 10, 2019

Government's push to affordable housing will revive the real estate sector.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE REALTY


Sep 30, 2020 02:11 PM

MARKET STATS