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Is it time to buy infra now?
Tue, 27 Mar Pre-Open

High interest rates and policy bottlenecks have impacted investment climate in the infrastructure sector. However, realizing that infrastructure is a key to economic growth government doled out quite a few goodies for the sector in the recent union budget. Here are the key highlights of the same:-

  • Doubling the amount of money that can be raised through tax free infrastructure bonds to Rs 60,000 crs.
    Impact: This will inject much needed liquidity into the sector.
  • Extension of viability gap funding to areas like irrigation, oil & gas storage facilities and telecommunication.
    Impact: Support from government in the form of grants is expected to boost investments into the sector.
  • Allowing External Commercial Borrowings (ECBs) for capex on road projects and reducing the withholding tax from 20% to 5%.
    Impact: Allowing road companies to access ECBs will provide them with funds at a cheaper rate. Reducing the withholding tax rate will further reduce the borrowing cost.
  • Encouraging private public partnership in the infrastructure projects
    Impact: Since private sector funds roughly 50% of the infrastructure spend in the country, steps taken to encourage the PPP based projects will further inject liquidity in the sector.
  • Targeting to award 8,800 kms of road projects in FY13 as compared to 7,300 kms in FY12.
    Impact: It would be positive for road developers in general.
Considering a slew of measures have been announced to boost investments in the sector can investors expect to see bright days ahead? Well, not really if one were to ask us. This is because the remedy to the current problem does not lie in liquidity infusion. It lies in reducing the cost at which the liquidity is available in the markets. Government's stance on policy reforms is also equally important.

While it is true that the rate cycle has reached its peak we do not expect massive cuts by the Reserve Bank of India (RBI) anytime soon unless fiscal deficit and inflation problems are in complete control. Although the recent Cash Reserve Ratio cut saw many infrastructure stocks rally on the expectation that rate cycle has reversed we believe it is a bit too premature to pre-suppose the same. One has to wait for further clarity on timing and extent of the cut considering the current deficit and inflationary issues.

Secondly, on the reforms front, government has become virtually handicapped due to the coalition pressures. Drying order pipeline due to the prevailing environmental issues has posed another set of problem for the infrastructure companies.

However, the current plethora of problems means that there a quite a few lucrative opportunities available in the market. So, which companies should investors ideally zero in on?

We believe there are three key aspects that investors should look at while investing in the infrastructure sector at the current moment. And they are:-
  • Strength of the balance sheet
  • Equity commitment for the Build, Operate and Transfer (BOT) projects
  • Margin of safety available in current valuations
Companies with strong balance sheet having minimum equity commitment are the ones to look out for. Further, having P/BV (Price to Book Value) of less than one provides reasonable margin of safety in valuations. It may be noted that the sector rarely trades below book value hence such companies tend to be good bargains. Investing in companies that stand the test of the said criteria can fetch handsome returns for investors in long run.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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