Given the huge government thrust on infrastructure, one would think that stocks in this sector are a blind pick. But that is wishful thinking as can be seen from the experience of the past five years. In early fiscal 2016, there was a glimmer of hope when order inflows picked up, especially from the government. But that petered out soon.
A CARE report points out that the investment climate remains muted in spite of efforts to clear stalled projects. It stated, “The rate of gross fixed capital formation (at current prices) is seen to decline for the third successive year." A Mint report pointed out that the number of stalled projects at the end of 2015 was the highest since this government took charge.
At the same time, rising costs due to legacy projects, overruns and delays has seen firms burdened with debt. For instance, IRB Infrastructure Developers Ltd’s net debt as on September 2015 was 12,565 crore. Adani Power Ltd’s was 48,477 crore, and GMR Infrastructure Ltd’s was 43,470 crore.
Road developers appear to be better poised compared to companies that cater to ports, power or railways. The National Highways Authority of India is trying to speed up execution by clearing hurdles and offering hybrid annuity models. From the revised government outlay in FY16, the budgetary outlay is up by 58% for FY17. But given the fiscal arithmetic, whether this would turn into actual inflows is anybody’s guess.
So far, stocks have not recovered much from their battering. Over the past 12 months, many have underperformed the broader market indices.
Firms are trying to do their bit. Some like IRB Infrastructure Developers are aiming to restructure balance sheets by moving assets to Infrastructure Investment Trusts, something that could bring down debt in the listed holding company. Another long-standing company, IL&FS Transportation Networks Ltd, too, has similar plans, which could unlock value for shareholders in the coming years.
Larsen & Toubro Ltd, the proxy for infrastructure in the country, has underperformed benchmark indices and has had a quarter of its value shaved off during the last 12 months. Yet, it would be the first to turn around, when the tide improves.
In any case, it will take time for these order inflows to fructify into revenue and margin gains. Investors might be better off riding the sector with relatively newer firms which have strong balance sheets. Sadbhav Engineering Ltd, for example, is a mid-sized company that has posted a steady rise in traffic and toll revenues, besides having the wherewithal to fund equity in forthcoming projects. But that also has to be weighed against its price-to-earnings ratio of 53 times.