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Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
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Have infra stocks run their course? 
(Fri, 27 Jun Pre-Open) 
 
India as a developing economy needs massive infrastructure if it aims for domestic demand driven growth for the country. We believe years of under investment in the sector has left the country with poor infrastructure be it roads, railways or power. Corruption, red tapism and political instability have also discouraged foreign investors from investing in infrastructure projects in India. Consequently, the sector has failed to pace up the growth which had kick started on a promising note. Notably, for FY14, infrastructure sector output growth slowed to 2.6 % from 8.5 % plus growth in FY10. However, with the formation of a stable and pro-reform government; a new lease life is expected for the sector. As a result budgetary allocation to the sector and announcement of key favorable policies; in the union budget to be presented in early next month will be keenly watched. After all, the fate of construction and infrastructure companies depend a lot on the budget as it lays down the road map for the spending and policies on the sector.

In the interim Budget for 2014-15, the allocation towards the infrastructure sector was raised by 8.6% as compared to the previous year. The new government is likely to raise the earlier allocation. Also, various schemes and policies are expected to be announced in order to spur the growth of the sector. For instance, as per a leading business daily; government is looking to establish an investment vehicle called the infrastructure business trust. It will provide a range of tax incentives for such trusts in the budget and is likely to incentivize the creation of such trusts. This shall lessen the tax burden of the investors. Also, huge investment in infrastructure can be mobilized only through public private partnerships (PPPs). Also, policy framework for enabling fast-track PPPs in order to carry out large-scale projects is also likely to be announced. Additionally, the government's commitment towards dedicated freight corridor and the diamond quadrilateral as well as construction of airports in tier-I and tier-II cities shall provide a fillip to the sector. As per a feature in Livemint; even if half of the proposed 9,000km of roads per annum which is promised in the election manifesto of the government are to be built, it shall mean immense order inflows for the infrastructure and construction companies.

The above mentioned measures in budget shall boost the investor confidence as increasing expenditure will lead to increase in order inflows for the construction and infrastructure companies. However, investment allocation is just the stepping stone. What the sector needs is faster and efficient project execution which implies removal of bottlenecks in terms of lack of funds as well as requirement of innumerable clearances.

Coming to the Infrastructure and related industries' stocks; most of them have witnessed unprecedented rally in the past few months. These stocks had been on investors' radar on expectation of investment pick up given the formation of a stable government. However, many of the stocks have already run ahead of their fundamentals factoring in the positives to a large extent. Hence we believe even if a reformist budget provides further impetus to these stocks; the upside will largely be capped. Therefore, we recommend investors to tread cautiously and invest in companies with a strong moat, efficient management, good execution track record and healthy returns.

Do you think the budget will drive another rally in the infrastructure stocks? Share your views on the Equitymaster Club

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