Bitter dose of reality hits infrastructure firms

Bitter dose of reality hits infrastructure firms

While the story of India’s infrastructure growth is in the spotlight, the sector has lost its sheen on the Street. Shares of new-age private sector infrastructure firms such as Lanco Infratech Ltd, GVK Power and Infrastructure Ltd, Adani Power Ltd and Madhucon Projects Ltd trade at less than half the prices they were at a year ago.

Also See | Risk Assessment (PDF)

Even on a three-year horizon, most infrastructure stocks have eroded investor returns compared with the benchmark Sensex of the Bombay Stock Exchange, which turned in a 25% return.

Investors are beginning to see the underlying risks in huge infrastructure projects, albeit a trifle late. All asset classes within the infrastructure sector—roads, ports, airports and power—have their cup of woes.

In a recent analysis, Edelweiss Securities Ltd has highlighted the sensitivity of asset returns to quantitative risks of interest rate hikes, cost of equity, cost overruns and lower margins and, more importantly, the qualitative aspects such as delays in government approvals and political issues.

While power projects with high project returns seem lucrative compared with ports, roads and airports, their vulnerability to risks weighs down returns. Frenzied buying was seen in power stocks until a year ago. Even initial public offerings of Adani Power and Reliance Power Ltd were lapped up.

The trouble is that nobody factored in the shortage of fuel that has hit most power producers. GVK Power’s latest financial results showed that the company’s plants operated at the lowest level in eight quarters due to gas scarcity. For others, falling merchant tariffs and delayed payments from cash-strapped electricity boards have seen expected returns go haywire, both for developers and investors.

Likewise, the Edelweiss report states that in the case of airports, divergence in regulatory norms from the bid period affected returns. Recently, shares of GMR Infrastructure Ltd and GVK Power fell as a court quashed the airport development fees being charged at Mumbai and Delhi airports to recover higher capital expenditure. A recent news report says the ports regulator rejected terminals’ request to hike rates.

In comparison, road assets emerge the most stable on the risk-reward matrix. A report from Elara Securities (India) Pvt. Ltd says strategic changes in 15-18 months have streamlined road projects. Besides, building roads is simpler compared with airports, power plants and ports; also, tolling seldom sees hiccups once the road is commissioned, unlike power tariffs. Pricing is politically sensitive in power, but not so in roads.

The biggest stumbling block for roads is land acquisition. For example, less than half the land has been acquired for IVRCL Infrastructures and Projects Ltd’s Goa-Karnataka highway.

Again, NCC Ltd, which had a head-start in road projects, seems to be mired in delays. Investors would do better in gauging promoter credibility in terms of timely execution of road projects.

But rummaging through all these complex issues to arrive at an investment decision is a tall order for a lay investor. Moreover, some infrastructure firms have exposure to two or more of the asset classes. One may not err by giving the sector a pass for some time to come.

Graphic by Yogesh Kumar/Mint

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