Fundamentals, not hype, will drive stocks after May 16

Sorting infra mess will require a pragmatic approach by the Centre and states. It could take longer than the market expects

The seemingly endless election cycle is finally coming to an end. By the end of this week, we will have a clearer picture of the 16th Lok Sabha. At that point, sanity might prevail and the market could stabilise in terms of following the fundamentals, rather than relying on hope and hype.

A large chunk of support for the National Democratic Alliance (NDA) is based on expectations that a new political dispensation might be able to push gross domestic product (GDP) growth into a higher orbit. It is inconceivable that this could happen without various stalled infrastructure projects being restarted. Something like six to seven per cent of GDP or even more is stuck in projects across various infrastructure sectors. Power, roads, ports, mining - almost every infra sector has seen projects in limbo.

Those projects have run into varied problems. One of the most common involves stalled environmental clearances. Another has been land acquisition woes. A third is financing stresses. A fourth is disputes arising from unclear policy. A fifth in the case of thermal power is fuel shortages. A sixth in ports is the lack of rail-road connectivity.

Sorting those require a pragmatic, multi-pronged approach, including good relationships between the Centre and states. It might take longer than the market expects. But any serious sustainable acceleration in GDP growth rates must involve at least some of these projects being restarted and completed.

The benefits would vary on a case-by-case basis. But three or four industries are guaranteed to benefit from any such reboot of the infra sector. The major beneficiary would be the construction industry, which has seen shrinking volumes and cash flow issues through the past three years. In every infra project, construction is a major chunk of the expenses. In the wake of a revival in the construction industry, there would be enhanced demand for cement and steel and other construction materials. There would also be enhanced demand for construction machinery, and for labour. These sectors are among the most beaten-down sections of the market, and with good reason. It would be a reasonable gamble to expect big rebounds in most of these areas if the stock market continues to rise at all after election results.

Among the sectors mentioned above, steel has several long-standing issues. Steel prices tend to move in line with international prices and those international prices are correlated to Chinese GDP growth rates. China has slowed and is expected to chug along at a relatively sedate rate through 2014.

Hence, steel prices could stay depressed even if there is stronger domestic demand. Up the value chain, the partial bans on iron ore mining could also mean problems in ramping up steel production. The steel industry should bounce, given a comeback in construction. But it could also be vulnerable to external factors.

Cement has suffered from a demand slump for three years. But consolidation within the industry and a construction boom could turn that situation around. Cement is insulated from external factors by its nature, since it doesn't travel very well. The cement industry tends to outperform the overall market in the January-March quarter and underperform in the other nine months. This year could be an exception, if there is a construction pick-up.

Construction itself is an industry that could offer rich pickings. There are many infra developer-cum-construction firms listed on stock exchanges. All of them have seen bad times in the past two financial years and most have stressed balanced sheets. A restart of the portfolios of stalled projects could be like oxygen to a drowning man and we could see share prices jump across the entire space.

The other major beneficiary from any such reboot would be the financial sector. A major share of the non-performing assets in bank portfolios are contributed by bad loans to stalled projects. Ditto for the specialised non-bank financial companiess which focus on infra finances.