Infrastructure is emerging as one of the top themes to play in the current scenario. Experts say that the opportunities are immense and opening up.
Infrastructure development is necessary if the government is to achieve the growth rate it is targeting, says Ambreesh Baliga, an independent market expert. Therefore one should look at companies operating in the railways, roads and power transmission and distribution (T&D) space that will benefit from the government’s initiatives.
As per a Deutsche Bank note on Indian infrastructure sector, the hypothesis is that mining would be early-cycle and is panning out, while railway capex seems to have been pushed back by a few quarters. However, power generation and T&D have picked up and along with roads, urban infra and water should drive orders in FY16 and first half of FY17.
Smart cities, defence, nuclear, LNG and housing restarts are the new segments that could kick off from second half of FY17.
While the government’s thrust on infrastructure is visible, the capital goods sectors is also seeing some traction given recent data and order flow of companies.
Larsen & Toubro remains amongst the top picks of most analysts. BHEL is also seen benefiting due to the emphasis on power projects. However, experts recommend that investors could use corrections to accumulate the two stocks.
For the roads sector, the opportunities are evident. While FY15 itself had seen about 3,000 kms of road projects being awarded, which was twice that in FY14, the National Highways Authority (NHAI) and Ministry of Road Transport and Highways is targeting about 9,000 kms of awards in FY16.
The government has also increased allocation to road sector in the budget for FY16 by almost 1.5 times. The ball is already rolling with companies bagging orders in this segment. Various measures to remove hurdles across infrastructure segments have been taken, and experts believe it is not far before we could see visible traction in the sector.
However, some concerns still remain. The first among them is that many companies still have stretched balance sheets and investors need to be cautious. The toll business is another area of worry, say experts. Looking at the public sentiments against toll plazas one needs to be cautious as the government is also focusing on undertaking due diligence. Some experts point towards caution with regards to companies undertaking/having built-operate-transfer (BOT) projects. Another section of the market, however, believes that the government will try to balance the public sentiments and interest of the companies. They do not expect much retrospective action and also say that to lure investments the government will have to keep the terms and business environment conducive.
Kunal Sheth at Prabhudas Lilladher says that in the past six months BOT projects had seen intense competition. Nevertheless, there are players who have proven track-record in execution of BOT projects and they still offer opportunities. He remains positive on companies like Ashoka Buildconand Sadbhav Engineering given their strong operating road portfolio, robust balance sheet and proven execution capability.
In the engineering, procurement and construction (EPC) segment, the preferred picks are KNR Construction and MBL Infrastructure, which investors could consider.
Another space that will see good amount of action is power T&D. The mismatch in demand-supply as well as the power needs require huge investments in the T&D space. Already, over Rs 100,000 crore of orders are being planned. In fact, this is one segment which did not see a slowdown even during the last 4-5 years when the economic environment was weak and many were complaining about policy paralysis. Here, the preferred picks include KEC International, Kalpataru Power andTechno Electric in EPC space and Alstom T&D in equipment manufacturing business.
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