Best Infrastructure Stocks in India

The infrastructure sector in India is an important driver of the country's economic growth.

Given that roads, railways, metros, etc. are an integral part of enhancing the productivity and operations of businesses, robust infrastructure is a must.

However, despite being one of the fastest-growing economies in the world, India is lagging behind the rest of the world with respect to infrastructure development.

To change this, the government of India has been taking various measures in recent years.

Resultantly, the tide has turned after a long time for infrastructure stocks. There's massive capex lined up backed by government's announcements on the production linked incentive (PLI) schemes.

An important thing here is that the benefits of the capex cycle will not be limited to infra sector. Think of the additional cement and steel required to build roads, highways, hospitals, and buildings.

A push to the infra sector directly lifts the gross domestic product (GDP) growth because infrastructure investment has a multiplier effect.

With a steadily rising population, the economy needs a massive amount of spending on constructing new infrastructure and rebuilding the aging assets to meet the needs.

Porter's Five Forces Analysis of the Infrastructure Sector in India

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry.

These are barriers to entry, bargaining power of suppliers, bargaining power of customers, threat of substitutes and competition within the industry.

A change in any of the forces normally requires a company to re-assess the marketplace.

Let us have a look at how these five forces shape the infrastructure sector -

#1 Barriers to Entry

The most attractive segment is one in which barriers to entry are high as they restrict the threat of new entrants.

Conversely if the barriers are low, the risk of new companies venturing into a given market is high.

In the infrastructure sector, barriers to entry are high, considering the capital intensive nature of the industry and reputation attached to the existing players.

#2 Bargaining Power of Suppliers

The bargaining power of customers is the ability of suppliers to put the firm under pressure. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.

This is low in the infrastructure industry, because of intense competition amongst them. However, in technology driven high-end segments, suppliers have the upper hand.

#3 Bargaining Power of Customers

The bargaining power of customers is the ability of customers to put the firm under pressure. It is high if buyers have many alternatives and low if they have few choices.

This is low in technology oriented segments. However, fierce competition in power generation and transmission equipment has increased bargaining power of customers.

#4 Competition

For most industries, having an understanding of the competition is vital to successfully marketing a product.

The competition in infrastructure sector is intense among major players. Companies compete on pricing, experience in a particular field, product quality, and capability of handling projects.

However, small companies are trying to revamp their scale and size.

#5 Threat of Substitutes

A substitute product uses a different technology to try to solve the same economic need.

This is low in the infra sector due to the nature of the industry. If a buyer wants to revamp or renovate its existing stock, it is likely to go to the same players.

Porters Five Forces Analysis of the Infrastructure Sector in India

When to Invest in Infrastructure Stocks

Infrastructure stocks are usually risker as their fortunes are prone to economic booms and busts and for this reason, they are often called cyclical stocks.

Generally considered an offensive tactic in investing, cyclical stocks can be used to generate high returns when the economy is doing well.

Therefore, the best time to buy such stocks is at the start of an economic expansion and the best time to sell them is just before the economy begins to slow down. However, before selecting a stock, one must check whether the industry is due for revival or not.

Key Points to Keep in Mind While Investing in Infrastructure Stocks

Here are some key points to take note of before you invest in infra stocks.

#1 Cyclicality risk

An industry cycle is characterized by an upturn as well as downturn. Cyclical businesses do well during an industry upturn and vice versa.

On the other hand, there are some businesses that are not very cyclical. These businesses are immune to changes in industry cycles in the sector and have less risk. In short, if the business is cyclical, higher is the risk.

Infra companies' operations are linked to spending by the government on infrastructure and the expansion plan a company undertakes.

As a result, during times of distress in the Indian economy, government can cut down on investments in infrastructure spending. This can have an adverse impact on infra companies' operations.

To mitigate this risk at certain extent, you could look at companies who have decent export revenues.

#2 Order book

You know it's a good time to invest in infra stocks when all infrastructure-focused firms experience strong order inflows. This could be due to government's big push or any other particular reason.

If the order book position of infra players is adequate, it provides near term revenue visibility.

Along with order book, also check the company's history of execution capabilities and whether it is able to execute at higher pace than others.

#3 Interest rates

For any infra company, interest rate is a big lever for earnings growth because in most cases, they are dependent on borrowed funds.

Infra companies will be able to grow their earnings at a faster pace when there's a reduction in interest rates.

#4 Profitability of the company

Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. So, measuring current and past profitability and projecting future profitability is very important.

Here's a list of top infrastructure companies in India based on their consolidated net profit.

Rs m, consolidated	Profit After Tax	PAT Margin (%)
Larsen & Toubro Ltd.	78,795	8%
Rail Vikas Nigam Ltd.	10,872	6%
GR Infraprojects Ltd.	7,608	10%
Ircon International Ltd.	5,443	8%
Kalpataru Power Transmission Ltd.	5,154	7%
NCC Ltd.	4,901	5%
PNC Infratech Ltd.	4,478	7%
KEC International Ltd.	4,344	3%
KNR Constructions Ltd.	3,818	12%
H.G. Infra Engineering Ltd.	3,388	9%

Data Source: Ace Equity
Data as of March 2022

#5 Debt to equity (D/E) ratio

A company uses both equity and debt to run a business. However, the amount of debt it uses indicates its fixed obligations. Higher the leverage, higher will be the fixed charges such as interest expense which will lower the profitability.

One must look for a debt to equity ratio of one or less than one.

Here's a list of top infrastructure companies in India with a low debt to equity ratio.

Rs m, consolidated	Debt to Equity (x)	Interest Coverage (x)
Ircon International Ltd.	0.00	4.21
KNR Constructions Ltd.	0.00	19.99
Likhitha Infrastructure Ltd.	0.00	110.66
PNC Infratech Ltd.	0.06	8.88
NCC Ltd.	0.20	2.32
J Kumar Infraprojects Ltd.	0.21	3.83
Nelco Ltd.	0.21	5.96
H.G. Infra Engineering Ltd.	0.23	9.60
GR Infraprojects Ltd.	0.25	8.72
Larsen & Toubro Ltd.	0.30	5.66

Data Source: Ace Equity
Data as of March 2022

#6 Return on Capital Employed (ROCE) ratio

Along with a low debt to equity ratio, a one must look for a high return on capital employed (ROCE).

Return on capital employed measures how much profits the company is generating through its capital. The higher the ratio, the better.

An ROCE of above 15% is considered decent for companies that are in an expansionary phase.

Here's a list of top infrastructure companies in India with more than 15% in ROCE. We have also provided their return on equity (ROE) and return on assets (ROA).

	ROCE (%)
Likhitha Infrastructure Ltd.	35.3
H.G. Infra Engineering Ltd.	33.8
KNR Constructions Ltd.	29.6
GR Infraprojects Ltd.	21.7
Techno Electric & Engineering Company Ltd.	19.1
Salasar Exteriors & Contour Ltd.	17.6
Rail Vikas Nigam Ltd.	17.0
KEC International Ltd.	16.8
Kalpataru Power Transmission Ltd.	16.2
Nelco Ltd.	16.2

Data Source: Ace Equity
Data as of March 2022

#7 Valuations

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

Being an asset heavy and cyclical business, the commonly used financial ratios used in the valuation of infrastructure stocks are -

Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

To find stocks with favorable P/BV Ratios, check out our list of stocks according to their P/BV Ratios.

Price to Earnings Ratio (P/E) - It compares the company's stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

To find stocks with favorable P/E Ratios, check out our list of stocks according to their P/E Ratios.

#8 Dividend yields

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

Here's a list of top infrastructure companies in India making healthy dividend payouts.

	Dividend per share (Rs)	Dividend Payout (%)
Nirlon Ltd.	26	211.5
Ircon International Ltd.	2.5	43.2
Rail Vikas Nigam Ltd.	1.8	35.1
NCC Ltd.	2	24.9
J Kumar Infraprojects Ltd.	3	11
Kalpataru Power Transmission Ltd.	6.5	18.8
Larsen & Toubro Ltd.	22	39.2
Man InfraConstruction Ltd.	1.3	44.3
Indian Hume Pipe Company Ltd.	2	16.8
KEC International Ltd.	4	23.7

Data Source: Ace Equity
Data as of March 2022

For more details, check out the top stocks offering high dividend yields.

Top Infrastructure Stocks in India

Here are the top infrastructure stocks in India which score well on crucial parameters.

#1 L&T

#2 Siemens

#3 ABB India

#4 Tube Investments of India

#5 BHEL

For more details on infra stocks, check out Equitymaster's Powerful stock screener for filtering the best infra stocks in India.

List of Infrastructure Stocks in India

The details of listed infra companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of infra stocks.

Best Sources for Information on the Infrastructure Sector

India Brand Equity Foundation (IBEF) Infra sector report - https://www.ibef.org/industry/infrastructure-sector-india

National Infrastructure Pipeline - https://indiainvestmentgrid.gov.in/national-infrastructure-pipeline

So, there you go. Equitymaster's detailed guide on the top infra stocks in India is simple and easy to understand. At the same time, it offers detailed analysis of both the sector and the top stocks in the sector.

Here's a list of articles and videos on the infra sector and top infra stocks in India. This is a great starting point for anyone who is looking to explore more about infra stocks and the infra sector.

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...