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The infrastructure premium

The infrastructure premium
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First Published: Wed, Jul 04 2007. 12 59 AM IST
Updated: Wed, Jul 04 2007. 12 59 AM IST
In a market that’s short on investment ideas, buy recommendations are getting lapped up with increasing enthusiasm.GMR Infrastructure is a case in point.
The stock had relatively few takers around the time of its initial public offering last August—its shares were issued at the lower end of the price band and they listed at the issue price (Rs210), with no money left on the table for investors. But things have changed dramatically in the past few months—the stock has risen 268% from its issue price to Rs772.
Buy recommendations from brokerages such as Motilal Oswal earlier this year would have helped, but what’s interesting is that they had set a price target of Rs502 and Rs560, respectively. Morgan Stanley had set a bull-case price target of Rs416 late last year.
The GMR stock has easily beaten all of these targets, implying that the stock is in overbought territory. It trades at about 140 times last year’s earnings, but analysts would be quick to point out that a stock like GMR cannot be valued on earnings, since its earnings from its airport operations aren’t yet fully reflected. But even analysts’ valuation estimates based on the sum of the various parts of GMR’s business is at Rs500-550 per share.
The premium GMR seems to be enjoying is because it’s one of few listed infrastructure plays in the country which actually owns the infrastructure. Most other players are involved in construction activity, where margins and returns are lower. Besides, the prospects on lease rentals from its airport properties have become brighter after the government approved a special economic zone by GMR near the Hyderabad airport, which is also being constructed by GMR. Besides, the firm said it will develop hotels and related facilities near its Delhi airport. But real estate development around its airports was part of most analysts’ valuation estimates and it’s surprising that the stock has suddenly added Rs10,000 crore to its market cap.
The Bombay Stock Exchange’s (BSE) small-cap index is busy hitting new all-time highs, even though a majority (about two-thirds) of the stocks in the small-cap space are trading far below their peaks.
The definition of what constitutes a small-cap share is debatable, but Mint research shows that the combined value of stocks with a market cap of less than Rs1,000 crore has dropped since 8 February, the previous market peak. The degree of the fall increases when the cut-off is reduced to Rs500 crore, Rs250 crore and Rs100 crore, respectively. Whichever definition one picks, small-cap shares have fallen.
This calls into question the effectiveness of BSE’s small-cap index, which has risen instead. Its constituent stocks have an average market cap of about Rs400 crore, which seems fine. But a closer look reveals that a few large stocks such as GVK Power, Gujarat NRE Coke, Bilcare, Shaw Wallace and Aptech were largely responsible for the rise in the index.
What’s interesting is that these shares have an average market cap of more than Rs1,750 crore, hardly qualifying to be in a small-cap index. (The small-cap index, according to BSE, includes stocks which form the bottom 5% of listed stocks in terms of market capitalization. All of these stocks have a market cap of less than Rs1,000 crore).
GVK Power has a market cap as high as Rs3,000 crore. But to be fair to BSE’s index cell, GVK had a market cap of less than Rs400 crore when it was included in the index last July. Its value has risen recently because of a large preferential issue and an increase in its share price. The problem is the shares will remain in the index until the next quarterly review.
One way out could be to have the review more often to cull stocks like GVK which no longer meet the qualification criteria.
Write to us at marktomarket@livemint.com
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First Published: Wed, Jul 04 2007. 12 59 AM IST