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Infrastructure stocks have been in the cold storage ever since projects got stuck over environmental and other clearances. But with general elections nearing and the Bharatiya Janata Party (BJP) sweeping all four elections on Sunday, the market is warming up to the idea of infrastructure stocks. There are many reasons for this revival of interest.
For starters, benchmark indices have remained range-bound largely, though corporate earnings have grown at a compounded annual growth rate of eight per cent over six years. While Indian equities broadly may not have been able to command the premium it historically has over this period, a handful of sectors have done well like technology, consumer and pharmaceuticals, while a vast majority have fallen. Some of this could change, as the market is looking for the winners of tomorrow when the economic growth picks up.
The infrastructure universe has underperformed the Sensex by 25 per cent, claim strategists and 20 stocks have seen their market capitalisation halve. Be it owners of assets (airports, ports, power and road) or capital goods companies (BHEL) or construction companies (Punj Lloyd, Gammon and HCC), almost every company in the sector is under tremendous stress. During FY14, most analysts had discontinued their rating on these stocks but with hopes of a change in government picking up, analysts are reassessing the potential of these beaten stocks.
A lot of these companies, especially power producers and construction companies, are in financial stress because they have not been getting their payments on time from state electricity boards or other government authorities.
The Street believes a lot of this could get cleared next year, which would improve the financials of companies like Lanco, which has dues nearing Rs 7,000 crore from state electricity boards. Religare Institutional Equities expects near-term euphoria to gloss over the weak macro (and our cautious portfolio stance) as 2014’s scenarios get recalculated. As a result they are recommending beta with rate-cyclicals — financials, capital goods and infrastructure stocks.
JP Morgan’s analysts have analysed 100 infrastructure companies and assessed that in the industrials and construction space, revenue growth could accelerate to 10 per cent in FY15 from four per cent this financial year, as the macroeconomic environment is expected to improve next year. Margins, too, are expected to improve in FY15 by 175 basis points for equipment suppliers, excluding BHEL. Though Larsen & Toubro has done better than other construction and engineering companies, it has underperformed the Sensex by 16 per cent over the past year. The Street believes that both margins and revenues will grow for these as the new government could debottleneck the sector.
