It's time to look at construction stocks

The slowdown in infrastructure over the past two years has many causes. Policy paralysis, financing issues in terms of both high interest rates and scarce capital, land acquisition issues and a logjam with environmental and other statutory clearances all contributed to the downturn.

As a result, the construction industry has also been badly affected. Construction, arguably a service industry, derives a large share of revenues from infrastructure projects. During the boom of 2004-08, over 70 per cent of revenues came from projects. Even now, infrastructure contributes about two-thirds of construction revenues.

Increased construction activity would have many positive outcomes. It is a massive employment generator for semi-skilled and unskilled labour — probably the largest single contributor to employment outside of agriculture. It is a major consumer of cement and steel and of sundry other materials. It is also a market for specialised high-end equipment.

The industry is fragmented, with some large listed players such as Larsen & Toubro, JP Associates, Lanco, Punj Lloyd, Hind Construction, IVRCL and Patel Engineering. Many of the larger players have also moved up the ladder to become project operators as well as carrying out construction activities.

Many of them have registered huge losses in the 2011-12 fiscal till date, and none has delivered a stand-out performance. Most have also seen their order-books stagnating, or even decreasing, which is another sign of slowdown. There is no real sign of a turnaround in the construction industry's fortunes even in the results of Q3 2012-13.

Assuming the government is serious about turning the economy around, it will have to accelerate processes and tackle persistent issues across the infrastructure space. There are some signs it is trying to do this. The new Land Acquisition Bill for instance, is not perfect. But it is an improvement on earlier legislation. Some financing mechanisms have been tweaked to allow for easier project financing and forthcoming cuts in interest rates would help anyhow.

Might this mean a turnaround for construction firms and by extension, rising demand for cement, steel and construction equipment? It's possible. There may be some visible improvement both in terms of activity, which will be reflected in order books and profit and loss accounts over the current quarter (Q4 2012-13) and the first half of 2013-14.

My sense is that the stockmarket has just started betting on this possibility. If the numbers do improve, listed construction firms could see a big bull run with several stocks capable of being multi-baggers from current price levels. I also believe that, given the inherent inefficiency and corruption involved in the Indian governance process, there will be hiccups. This means that construction could see a volatile bull-run with sudden spurts interspersed with sharp corrections.

The author is a technical and equity analyst