Construction firms get thumbs up on Modi's spending plan

Larsen & Toubro has rallied 27% this year, beating the benchmark gauge which has risen 19%

Prime Minister Narendra Modi's plan to spend a record $60 billion on infrastructure this financial year has started trickling into company earnings, giving analysts a reason to turn optimistic about Indian construction stocks.

Larsen & Toubro (L&T), the nation's largest engineering firm, has rallied 27 per cent this year, beating the benchmark gauge which has risen 19 per cent. Gayatri Projects and KNR Constructions, which build roads, and Simplex Infrastructures have also surged.

The outperformance may continue as the nation's central bank rate cut of 200 basis points since December 2014 is helping companies better manage leverage, while new orders are expected to pick up pace in second half, brokerages including Macquarie Group said.

And, now that the June-quarter earnings season has concluded, bullish notes are trickling in. Macquarie Capital Securities India analysed results of 12 companies from the sector with combined revenues near that of L&T's engineering and construction division. Their total revenue rose 12 per cent after three quarters of no growth. Goldman Sachs India said first-quarter earnings suggest that there are "green shoots" for cement consumption driven by low-cost housing and infrastructure.

L&T, viewed as a bellwether for domestic economy, reported a 16 per cent jump in revenue from its infrastructure segment, the most in five quarters. The growth was driven mainly by the local market, the company said.

Earnings "read across of the mid-cap EPC space supports our thesis of domestic capex revival," Macquarie's analyst Inderjeet Singh Bhatia wrote in an August 22 note. He has the equivalent of a buy rating on Larsen and NCC, a construction company.

Robust orders

Order books have strengthened, thanks to construction of metro rails and buildings, and the analysts expect government agencies like the National Highway Authority of India to catch up with their target of building thousands of kilometres of roads after the monsoon season ends in September. The government in February pledged a record Rs 3.96 lakh crore to build and modernise infrastructure. In the April-June period, it spent Rs 68,300 crore on building assets such as roads and power plants. This was about 22 per cent of the budgeted full-year expenditure versus 20 per cent for the year-ago period, official data show.

Company commentaries on the outlook continue to be very encouraging, Bhatia said. Outside of roads and metro, other sectors like irrigation and affordable housing have also started to show early signs of growth, he added.

Government spending is strong, and construction of low-cost homes and rural roads is likely to pick up in second half after a second year of near-normal monsoon, Goldman Sachs analyst Pulkit Patni wrote in a note on August 23. Suppliers to construction companies such as Kajaria Ceramics and Dalmia Bharat, may also benefit. Goldman has a buy rating on the companies. Patni also likes UltraTech Cement because of strong earnings growth.

Bloomberg