According to a World Bank study, every one per cent increase in investment in infrastructure assets adds a per cent to the gross domestic product growth. This is probably one of the reasons that Prime Minster Manmohan Singh has chosen to boost infrastructure spending in the country to deal with concerns over domestic economic growth.
Investors in the sector, who have not had much to cheer about, are likely to get some relief as stocks of many infrastructure companies rallied on hopes of better days ahead. Analysts consider the push for infrastructure growth as a positive development. However, the effectiveness is to be monitored on the execution front, as mere announcements may not help in the near term, as companies face challenges on multiple fronts.
“Given the slow pace of approvals for major projects in the recent past, such a decision may at the very least increase the pace of tendering of key projects. However, land acquisition issues remain key to execution,” says Venugopal Garre, who tracks the sector at Barclays. Industry watchers believe there are more initiatives needed on the execution front.
|HIGH ON HOPE
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|Larsen & Toubro
|Power Grid Corp
|Great Eastern Ship.
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List of companies which are a part of CNX Infra index
Adds Manish Sonthalia, vice-president and fund manager, Motilal Oswal Asset Management: “This comes as a sentiment-booster for the sector. But more than that, we need to see policy action which will facilitate execution in the areas of land acquisition, availability of coal, environmental clearances and financial closure to name a few.” Valuations of most of the companies are at historical lows. Analysts advise investors to buy only those companies with a strong balance sheet, are low on leverage and enjoy handsome margins.
Aiming high, lacking execution
The prime minster’s infrastructure development push includes plans to award 42 new port projects, costing Rs 14,500 crore, along with investments in two major ports at West Bengal and Andhra Pradesh, costing Rs 20,500 crore. The government also announced it would award new airport projects, including the Navi Mumbai airport.
“The key focus is on railways and ports where we think companies like GMR (Infrastr-ucture), GVK (Power and Infrastructure), Adani Ports and Gujarat Pipavav (Port) could be key beneficiaries. However, one needs to see the actual awarding and financial closure of the projects because in many of the cases balance sheets of companies are stretched,” says Manish Kumar, who tracks the infrastructure sector at SBICAP Securities.
Additionally, about 9,500 km of new road projects along with 4,360 km of road maintenance contracts are likely to be awarded. This comes as a welcome relief to companies in the road segment such as IL&FS Transportation Networks Ltd and IRB Infrastructure Devel-opers Ltd, considering that the new target was significantly higher compared to road projects of 6,500 km awarded in FY12. The government has also aimed at adding 18,000 megawatts (Mw) of power capacity, in addition to 2,000 Mw of atomic power. This is significant compared to the average power capacity addition in the region of 12,000-14,000 Mw seen over the last five years. This is good news for companies in the power equipment segments such as Bharat Heavy Electricals Ltd, BGR Energy Systems Ltd and other smaller players.
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There are a number of companies which could benefit from increased focus on spending in the infrastructure sector. However, apart from the policy and execution issues, analysts warn that investors should look at good quality companies. Many companies have stretched balance sheets and interest rates are still high which could come in the way of benefiting from the opportunity. Analysts say Larsen and Toubro Ltd (L&T) is best-placed or geared to benefit as a result of increasing focus on the infrastructure spending in the country.
L&T is well-diversified, especially its presence both in the power and construction and engineering space makes it most likely candidate to benefit. “Slowdown in the orders is an industry issue but companies such as L&T have maintained margins even in a downturn. Its peers have reported losses,” says Manish Sonthalia.