Given the increase in allocation for infrastructure, steps to ease project financing and low valuations, analysts believe investment in infrastructure stocks could yield good returns over a year’s time
Infrastructure stocks, which have underperformed broader markets for some time now, could deliver good returns this year, thanks to the government’s enhanced focus on infrastructure spending and measures to ease funding of projects. Taking cues from this, most infra stocks gained more than the broader indices on Tuesday.
In the Union Budget, the government has announced it will spend Rs 2.72 lakh crore in 2011-12, which is 21 per cent higher than that in the current financial year and accounts for almost half the planned allocation.
Additionally, projects worth Rs 50,000-60,000 crore of last year have been delayed (piled up) due to uncertainty and execution delays. As and when these pick up, it should improve revenue flow of companies in this space. More important, concerns over rising interest rates and slower execution have led to many of these stocks now quoting at historically low valuations, making a case for good returns.
“Most companies have good revenue visibility with order book of 2.5-3 times the 2010-11 sales. In fact, the valuations, too, are attractive, based on one-year forward earnings. I think, there is not much down side to the stocks which should get re-rated from these levels,” says Abhinav Bhandari, who tracks infrastructure at Elara Securities. He , however, believes that interest rates, commodity prices, execution, land acquisition and environment clearances are among concerns and could keep these stocks under pressure in the near term. While low valuations and reasonable revenue visibility provide downside support, experts suggest investors should monitor interest rates and commodity prices, as any favourable change in these could lead to improved earnings and re-rating of the sector.
“I think the interest rate cycle has peaked out and, in the second half of the current year, we should see more traction in the infrastructure space, given that now the government is ready to spend — as we have seen the incremental allocation in the Budget. The environment is now more conducive for infrastructure spending and, even if there is another 25 basis point rise in interest rates, it should not drastically hit investments in the sector,” says Sachchidanand Shukla, economist, Enam Securities. However, economists also believe that given the targeted fiscal deficit of 4.6 per cent of GDP, the risk of higher domestic borrowing costs is lower.
Positive moves
The Budget clearly focused on infrastructure, which economists believe will improve the overall environment and attract private investments into the sector. “Another big plus for infrastructure could come from the ongoing gradual opening up of the economy to capital flows. The limit on foreign institutional investor (FII) participation in infrastructure bonds has been increased from $5 billion to $25 billion. This could be a crucial reform going forward if the $1-trillion infrastructure investment in the 12th Five-Year Plan has to be financed in a non-disruptive fashion,” says Samiran Chakraborty, regional head of research (India), at Standard Chartered Research.
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Further, to boost infrastructure spending, public sector institutions operating in the infrastructure space have been allowed to raise Rs 30,000 crore through tax-free bonds for finance projects. Also, the Rs 20,000 additional tax deduction to individuals for the investments in the infrastructure bonds has been extended by a year. Higher disbursement under the take-out financing and focus on policy of PPP (public-private partnership) projects are considered steps in the right direction. These will not only help improve funding but also avail of funds at relatively cheap rates. “Measures to raise funds have been definitely positive for the sector, as it opens more avenues. Additionally, the companies do not have to crowd out to banks for funding, in addition to the benefits that funds could now be available at cheaper rates. To that extent, the additional funds could be raised at about 8-8.5 per cent, compared to 9.5-10 per cent earlier,” says Ashish Chandak, executive director (infrastructure banking, corporate finance), YES Bank.
Top picks
Given the changing environment, analysts are bullish on companies operating in the road and highways segments. Bhandari expects about Rs 40,000-50,000 crore opportunity in roads and highways over the next one year, which is also a reason he likes stocks like ITNL, IRB Infra and Sadbhav Engineering. Among other companies GVK Power & Infrastructure and Jaiprakash Associates are those that Satyam Agrawal, who tracks infrastructure at Motilal Oswal Securities, recommends. Post correction, analysts also like IVRCL Infra and engineering major, L&T, given its reasonable valuations and diversification along with the higher execution capabilities.
