Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Market / Mark-to-market/  Infra stocks sizzle as govt tackles funding constraints
BackBack

Infra stocks sizzle as govt tackles funding constraints

Shares of infrastructure construction firms vaulted after the budget, poised to ride on allocations for infrastructure

Budgetary outlays and ambitious road, railway, port and energy projects have been an annual fare. This time, efforts are on to sort out clearances and ease funding, the two big concerns of the sector. Photo: Hemant Mishra/Mint (Hemant Mishra/Mint)Premium
Budgetary outlays and ambitious road, railway, port and energy projects have been an annual fare. This time, efforts are on to sort out clearances and ease funding, the two big concerns of the sector. Photo: Hemant Mishra/Mint
(Hemant Mishra/Mint)

Shares of infrastructure construction firms vaulted after the budget. The Street, however, was discerning. Small and mid-sized firms with healthy order books and balance sheets, poised to ride on budgetary allocations for infrastructure, rose the most. NCC Ltd jumped 19.68%, Ahluwalia Contracts (India) Ltd by 10.60%, Ashoka Buildcon Ltd by 12.14% and Sadbhav Engineering Ltd by 6.83%, even as infrastructure behemoth Larsen and Toubro Ltd (L&T) rose by 4.34% since Friday’s closing.

What was different in the recent budget is the government’s effort to sort out problems that were holding back infrastructure development. Budgetary outlays and ambitious road, railway, port and energy projects have been an annual fare. This time, efforts are on to sort out clearances and ease funding, the two big concerns of the sector. Apart from a total capital outlay of 82,600 crore for roads and transport, the collections from road and fuel cess, which may nearly double in 2015-16, will be used to fund projects.

In any case, the mood was already set a week prior to the budget with the announcement of the hybrid annuity model for road projects, where the government will bring in 40% of the project cost.

Over the last two-three years, the sector has painted a poor picture of stalled projects awaiting clearances on various issues, a dwindling number of interested developers and paucity of funds. Things could hardly get worse.

The euphoria in the sector is because of the hope that faster clearances and the government’s commitment to 40% equity participation will ensure easier fund flow. For a developer, the risk of lower return and losses is limited to 60% from the earlier 100%.

In the recent past, some firms experienced project delays and cost overruns that led to lower profitability. Such revenue uncertainty and risk would be lower in the new model as the government is responsible for clearances and also collects the traffic toll. There may be higher interest in refinancing projects, if need be. Further, the developer has to achieve financial closure for only 60% of the total project cost, which could make lending institutions less apprehensive.

According to Icra Ltd, it will alleviate the burden on the government for engineering, procurement and construction projects as it has to get funds for only 40% upfront and the rest gets spread over the concession period of 10-15 years.

Although the hybrid model may attract higher private sector participation, according to Emkay Global Financial Services Ltd, the government has awarded only 50% of its intended projects in the first nine months. The balance may be announced in March, which has been the case in some years.

Of course, until the budget was presented, there were apprehensions on how the government would find the resources to fund 40% of the project cost. The budget has tried to address this. Tax-free infra bonds would be used to tap funds. A National Infrastructure Investment Fund would be set up with annual cash flows of 20,000 crore.

Further, the last two years had seen severe competition as fewer tenders were being chased by a multitude of firms. Infra firms had bid low, jeopardizing long-term profitability. Now, with higher budgeted outlay in 2015-16 for roads and ports, analysts say there may be enough order inflows for mid-sized firms. Meanwhile, gradual economic recovery has seen toll revenues pick up and operating profit expanding in the December quarter, although the profit margins were yet to pick up.

Another shot in the arm for firms like NCC, Ahluwalia Contracts and L&T has been the thrust on ports and urban and rural housing, where these firms have interests. In the near term, order inflows may improve. But profit margins would get better as the scale of operations improves.

The writer doesn’t own shares in the above-mentioned companies.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 03 Mar 2015, 09:17 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App