It could be a huge mistake at this point in time to plunge into some of the low quality infrastructure stocks, which more than the hope could be up because of the trader’s interest. Most of the infrastructure companies continue to face serious issues both in terms of earnings and on the balance sheet.
However, there is ray of hope that in the coming months the sector could actually revive backed by expectations of stable government after the elections.
In this background, here are four stocks which are relatively safer given their balance sheet strength and business model besides having good earnings visibility.
Va Tech Wabag
Within the infrastructure space, VA Tech Wabag is a promising water technology solution provider. Its presence in the water and waste water industry helps it remain relatively insulated from any slowdown.
Additionally, its exposure to the international markets, particularly in the developing world where the water treatment, sanitations related projects funded by the international funding agencies like World Bank and others continues to flow.
That apart, the company rely less on the debt and continues to generate good operating cash without much requirement for the capex for the growth. Thankfully the business prospects have been improving as in the first nine months ending December 2013, the company has grabbed orders of worth Rs 3048 crore as against its earlier guidance of about Rs 2700 crore for the full year.
With an annual sales turnover of Rs 1618 crore, the company's order book is almost Rs 6000 crore or 3.7 times which is good enough to provide the revenue visibility for the next three years.
Larsen & Toubro (L&T)
L&T is safe bet considering its leadership in the sector, balance sheet strength, diversification in terms of geographies and segments and strong order book (2.2 time FY13 consolidated revenues). On the growth, analysts believe that FY15 should better for given the expected revival in the earnings and order book for the company.
Also, apart from the gains that could come in case of revival in the sector the company is expected to do well because of the restructuring of some of its businesses and subsidiaries, a marginal gains on the margins front and possible monetisation of stake in IDPL and Dharma Port.
"Post a 50% stock up move, we believe there is still quite a lot of steam left and we say buy. L&T looks set to grow sales 15% over FY14E-16E with stable margins. Also, domestic capex should rebound in early FY16 and we expect L&T will emerge stronger from recent Indian economic deceleration and outperform peers when economy accelerates. Also, if the domestic economic rebound takes time, L&T has the ability to pick up international orders" said Venkatesh Balasubramaniam who tracks the company at Citi Research.
IRB Infrastructure Developers
There are doubts if the road sector will revive in the near-term and work will expedite. But whenever the sector revives the companies like IRB Infrastructure is well placed to take the advantages of the growth considering its capabilities and balance sheet strength. Besides, IRB is does not have major balance sheet issues given the FY13 debt to equity ratio of 1.13 times and interest coverage ratio of 2.35 times.
That apart, the company is sitting on huge operational BOT road assets which generate enough cash flows, which allow the company to remain profitable and face industry downturn. At Rs 100, stock is currently trading at 7 times and offering a dividend yield of almost 5%.
Engineers India
Given the exposure to the hydrocarbon sector, especially in the public sector projects, the company is able to maintain high sales of 27% and annually and on an average generated cash of about Rs 400 crore from the operations over the last five years.
Importantly, its business does not require much capex or cash to be deployed in the business because of which the company is almost debt free and generate strong return on equity of about 30% besides rewarding its shareholders with the generous dividends.
Currently, the stock offers nearly 4% dividend yield. That apart, the scrip currently trades at 11 times, which is reasonable given the growth and return ratios. In terms of growth, Engineers India is well placed to take the advantage of future capex in hydrocarbon sector. The order book at Rs 3,800 crore, or 1.5 time its FY13 sales, provides good revenue and earnings visibility in the medium-term.
