Infra stocks crack; analysts favour selective buying

Analysts suggest that formation of a stable government post the upcoming General Elections is likely to positively impact the construction sector

Populist measures have begun to cast their shadow on a probable rise in the fiscal deficit. The latest addition to the woes is the additional burden of around Rs 5,000 crore on account of hike in the cap on subsidised cooking gas cylinders. As a result, efforts are being made to ensure discipline and the first victim of the move is a cut in infrastructure spending.

In a latest move, the union finance ministry has slashed funds for the third phase of the Delhi Metro Rail project, by Rs 528 crore to Rs 2,592 crore, reports suggest. Budgets for upcoming Metro projects in Chennai, Mumbai, Jaipur and Bangalore have been impacted by similar cuts.

Points out Dhananjay Sinha, head of institutional research at Emkay Global Financial Services: “Most measures adopted by the government to reign in the fiscal deficit/GDP (gross domestic product) ratio below 4.8 per cent are one-off adjustments  and further defer the required rebalancing. Asset sale, stake sale, higher dividends from public sector undertakings and a cut in capital spending reflect poor quality of fiscal management. Unless meaningful fiscal consolidation is undertaken, it is unlikely that a backdrop for sustainable growth can be created.”

“Controlling expenditure and postponing certain subsidy payments are the only possible ways to achieve the budgeted target. Any slippage on a fiscal front could lead to higher borrowing requirements,” suggests Gary Dugan, chief investment officer (CIO) for Asia and the Middle East, RBS Wealth Division.

Stocks crack
Reflecting these concerns are the stocks of infrastructure related companies, that have slipped by as much as 30 per cent in 2014. The National Stock Exchange (NSE) infrastructure companies index – CNX Infra, has underperformed the market by falling 10 per cent so far in 2014, as compared to a 2.8 per cent decline in CNX Nifty. In calendar year 2013, the CNX Infra index had recorded a 4.2 per cent fall against a 6.8 per cent gain reported by the benchmark index.

The CNX infra index comprises stocks of telecom, power, port, air, road, rail, shipping and utility companies. Among individual stocks, shares of Jaypee Group companies Jaiprakash Power Ventures and Jaiprakash Associates are among the top losers – cracking 28 per cent, and 27 per cent respectively, so far in 2014.

Turnaround
Analysts suggest formation of a stable government after the coming general elections, which might enable higher investment in infrastructure than before, is likely to positively impact the construction sector. However, a fractured electoral mandate, with the potential for an unstable government, would be seen as a negative, they say.

Sandeep Upadhyay, head of infrastructure solutions group at Centrum Capital Limited, believes with elections on the anvil, while some   large projects are expected to be announced the main issue that remains is about firming   the means of financing such mega projects (including Metro, highways and ports).

“While private developers are finding it difficult to attain financial closure on   BOT (build-operate-transfer) projects, the government and   regulators need to re-visit the development model for undertaking some of these projects on the public–private partnership (PPP) basis,” he says.

“One can’t apply a broad brush across the entire infra sector, as there are disparate trends visible in its sub-segments, with a separate set of dynamics playing in each. One must understand where each of these companies is placed as regards future cashflows, policies, as also whether the pace of regulatory clearances for the affected projects, is meaningful, if at all,” said Lalit Nambiar, fund manager, UTI AMC.

“Cash flow visibility of the projects and financial leverage of the company would be key parameters in the present climate. In general, companies engaged in port management and road construction are possibly better placed compared to, say, those operating in the power space,” he adds.

Fundamentally, the infra story is intact, believes Upadhyay of Centrum, and stocks where the companies have been moving towards a relatively asset-light model and maintaining lower leverage will bounce back sooner than later. However, being a largely regulated sector, potential stakeholders of some of these infrastructure companies are likely refrain from making fresh commitments till the elections are over, he says.