Asset monetisation, robust awarding to augment growth in infra sector; GR Infra, KNR among top stock picks
Indian equity markets have been highly volatile in the past few sessions, swinging between gains and losses. Amid this volatility, analysts believe that thematic, stock specific approach may help make better investment decisions. One of the sectors that investors can look at is infrastructure. Nifty Infra index has rallied around 10% in the last 6 months, outperforming benchmark Nifty 50 which has risen 8%. Infra sector stocks started rallying after the Union Budget for 2022-2023 was announced as in her speech, Finance Minister Nirmala Sitharaman had announced that the government will focus on the ‘Gati Shakti’ plan. The government also announced a 35% on-year increase in infrastructure capex.
This is backed by the government’s announcements on the production linked incentive (PLI) schemes. Additionally, global supply chains are shifting away from China and India is a key beneficiary of that trend. All these factors laid the foundation for the next leg of growth for the infra sector. Infra companies have started to show an increase in profit margins already and some have deleveraged their balance sheets and even improved cash flows. According to analysts at HDFC Securities Institutional Equities (HSIE), Tier-1 infrastructure developers are trading at ~8.5x 1-yr forward valuation. “The recent correction presents an attractive entry point for strong balance sheet players. We expect competitive intensity to reduce as middling players’ order books are full and in recent bids we are seeing that fewer companies and bids are below cost,” they said.
Top stock picks
HSIE analysts believe that infrastructure asset creation is top priority of the current government, which may lead to robust ordering over the next decade. Their top stock picks include GR Infra, KNR, PNC Infra, HG Infra and NCC. Within the Capital Goods: L&T, Cummins India and Kalpataru are their preferred picks.
Tailwinds: Asset monetisation, robust awarding and strong tier-1 balance sheet
According to the HSIE report, the government’s intention of expanding highway programs augurs well for project awarding. “With debt embargo on NHAI (Capex to be funded by budgetary support), we expect its balance sheet to improve. Asset monetisation may further strengthen NHAI balance sheet as sovereign funds have shown strong interest in recent NHAI and private road projects,” it said. Tier-1 developers continue to remain cautious and seem to be choosing balance sheet over growth. This augurs well for long term rerating and asset creation, according to analysts.
Financial institutions joining party, limited understanding on pricing risks may squeeze sectoral funding
According to HSIE analysts, flush liquidity, low cost of funding, and limited avenues for credit growth have led to PSU banks stepping up lending to the sector, irrespective of developer quality. “Decentralized decision making, absence of in-house project finance teams, lackadaisical approach to risk have made it easy for developers to raise HAM debt. It has become L1’s market and there is limited 40-50bps rate differentiation between best and middling developer,” they said. Tier 1 private banks have become cautious, seeing aggressive bidding, high inflation, and rising interest rates.
Key risks
Despite strong ordering momentum, analysts at HDFC Securities Institutional Equities are seeing emergence of headwinds to the Indian highways program. According to them, substantial dilution of bid qualification has exposed the infra sector to low quality, inadequately funded developers taking large order inflow market share. “This has the potential of de-railing the NH program, creation of sub quality infrastructure, time and cost overruns and eventually higher cost to completion and defaults,” they said adding that financial institutions are playing at the party with reckless sector lending, benchmarking the developer’s risks under the garb of NHAI AAA rating.
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“We remain cautiously optimistic as HAM projects are being bid like EPC projects, which shall lead to equity shortfall and execution delays. EPC players with strong balance sheets, conservative bidding stance, and secured funding stand to outperform as the dust settles,” analysts further said.
Dilution in bid qualification poses systemic risk
Post COVID-19, substantial dilution in the NH bidding norms has been seen. Whilst this was initially done to support developers, the same has not been rolled back, according to the HSIE report. This resulted in smaller developers with limited understanding of risks taking up higher market share of orders awarded. “Our analysis shows some of these developers have net worth lower than the cumulative HAM equity requirement, whilst a few don’t even have capital for upfront equity infusion and are in the market to raise NCDs to fund equity. This poses a strong challenge to project execution and may result in cost escalation and delays/defaults,” analysts said.
(The stock recommendations in this story are by the respective research analysts and brokerage firms. FinancialExpress.com does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)
