Infra Stocks: Citi recommends sell

New project announcements dropped 39% y-o-y in the first quarter of FY13

The run up in prices of infrastructure and electric utility stocks in June 2012 do not seem to be supported by any fundamentals. A report by Citi titled India Infrastructure Insights concluded the above statement and advised investors to book some profit in these sectors ahead of the first quarter FY13 results season.

According to the report, new projects announcement in the first quarter of FY13 have fallen again after an uptick in the fourth quarter of the previous year. New project announcements dropped by 27 per cent quarter on quarter (QoQ) and 39 per cent as compared to the same period in the previous year.

Government orders saw a sharp drop of 45 per cent as compared to the previous year, though it showed a marginal improvement of 5 per cent over previous quarter. Expectations of government order picking up after the election season ended in the previous quarter has not materialised.

Importantly private sector new project announcement has dropped drastically by 39 per cent QoQ and 35 per cent YoY. The four quarter moving averages of total/government/private new project announcements continued to head down.

A silver lining is that there has been some movement in stalled projects. This according to the Citi report is probably due to government’s effort to smoothen project implementation. However, quantum of projects shelved has jumped sharply and those completed have moved up by 3 per cent YoY but fell 68 per cent QoQ.

Overall the scenario for the infrastructure looks bleak. Rapid progress on power sector reforms, land acquisition bill, improvement in coal production, increase in pace of approvals and a decline in cost of capital is needed for the sector to pick-up.

Till then, Citi says there is little reason to be excited about the run up in share prices.