An Infrastructure Dream Team
One basic fact has been obscured by the many irrelevancies thrown up in this election. If you believe in Indian economic growth, then you have to believe in explosive infrastructure investment. Because growth is impossible without enormous improvements in the roads, power and telecom sectors. To paraphrase Clinton, the real issue is, The infrastructure, stupid!
A ballpark figure for necessary investment in these areas varies according to whom you ask. The lower end starts at around $75 bn in investment over the next decade. The higher estimates simply add on a few more zeroes. Thats a lot of money.
So private investment in infrastructure is sine qua non unless India remains a quaint leftover from the Stone Age. Who, how and where the investors will be is an open question. So, how can investors participate in infrastructure investments? In telecom, the pace of technological change is so rapid its dangerous to even guess as to who will emerge topdog. Likewise power, where many techno-models have to be debated apart from the political problems.
But, assumptions can be made in areas such as building more roads and constructing more buildings for all the other infrastructure projects. The technology here is well-known and extant construction and heavy engineering outfits must do well. Theyll either float JVs or consortiums or simply work as sub-contractors. But they will participate and profit from the process. Still more basic commodity manufacturers such as cement-makers will also find offtake increasing. Financial outfits catering to infrastructure growth will also speed up credit disbursal.
This is an LP in an age of CDs. Investments in such stocks wont pay today, tomorrow or even next year. But they will pay off handsomely in the long run. Now seems like a good time simply because share prices are depressed, the economy is in recession and these stocks are available very cheap.
So lets construct a long-term infrastructure dream portfolio. First, pick a financier. ICICI has to be high up on the list. As the second largest financial entity, it will be a major participant. Unlike banks, this FI isnt trammelled by priority sector lending. Through its subsidiaries, ICICI Securities and ICICI Bank, it has increased both equity participation, as well as lowered its cost of funds by entering retail banking services. It should soon be a one-stop shop with its fingers in every financial pie. Large-scale infrastructural investment cannot take place without ICICI benefiting. Currently trading at a price of Rs 81 and a P/E of 5.
Then look at the commodity stocks. I like Gujarat Ambuja Cement here, though almost any cement-maker should do well. Cement companies get some protection from imports since the stuff is expensive to transport. Gujarat Ambuja gains over others because it has the proven ability to consistently exceed 100 per cent capacity utilisation as well as the foresight to have developed shipping facilities. If there is a demand for cement in someplace where no local cement company exists, Gujarat Ambuja can deliver faster and cheaper. The recession has pushed shareprice down to Rs 252 and the P/E is at 14.
Now look at construction and heavy engineering firms. I Larsen & Toubro, though its under a temporary cloud. As an integrated, well-managed construction and engineering firm, it can do almost any sort of turnkey project. It can build roads, it makes its own cement, it can construct buildings you name it. The recession and high working capital costs has hit both bottomline and share price. It is currently trading at Rs 200 and a P/E of 12 which is mighty low for such a good stock.