Five Infra Stocks That May Sizzle Following Govt Push
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Introduction
During the 30 months of Narendra Modi-led NDA government in the Centre, the biggest push has been given to the infrastructure sector. Modi known for his weakness towards urban infrastructure and also roads, ports sectors since his days as Chief Minister of Gujarat, is albeit continuing his focus on the infra development, this time his activities are not confined within Gujarat but across the length and breadth of the country. Several key road projects worth thousands of crores are being executed under the leadership of his trusted lieutenant, Nitin Gadkari while Modi’s another trusted man, Venkaiah Naidu has been assigned the task of working towards a better urban infrastructure across the country. The end result will not only improve the living condition of ordinary citizens but also strengthen balance-sheets of the infrastructure majors and even smaller players in the sector. In addition to all the direct efforts made by the Centre, reforms like debt arbitration schemes, further push from NITI Aayog, RBI’s S4A scheme will be infusing further life in the infra entities. Obvious, these steps will augment liquidity and may give oxygen to suffocated infrastructure companies in the county.
The government’s target is Rs 25 trillion investment in infrastructure sector over a period of three years. This will include Rs 8 trillion for developing 27 industrial clusters and an additional Rs 5 trillion for road, railway and port connectivity projects.
Union Budget 2016 allocates a comprehensive gigantic outlay of Rs 221246 crore for the infrastructure sector, including railways. Over the earlier years, 85 per cent of the halted infrastructure projects suffering on account of heritage issues are now functional and back on track. As much as Rs 97000 crore alone has been kept for road and highway connectivity, including through issue of NHAI bonds. Government anticipates approving approximately 10k km of national highways and taking up 50k km of state highways for upgradation as national highways during the proposed year.
Government Reforms
To resolve issues which are being faced by the industry, NITI Aayog placed a proposal before Cabinet Committee on Economic Affairs (CCEA) for its consideration suggesting various short- term and long-term measures.
The process of arbitration was initiated with pre-amended Arbitration Act. Now government bodies are seeking consent of contractors to transfer pending cases under the amended Arbitration Act wherever possible. The shift to amended Arbitration Act is expected to make the arbitration process more cost effective and help in settlement of the disputes in a timely manner.
The premier policy making body has also separately issued instructions on the subject with regard to immediate measures to be taken by all concerned for revival of the construction sector.
Government’s approval of new arbitration guidelines will help in speedy resolution of claims pending in arbitration for years. The newly adopted reform measures will provide much-needed liquidity for the infrastructure sector.
Government will also release 75 percent of the arbitration award against margin free bank guarantee in situations where the award has been given but contested by the concerned authorities. All arbitration cases will be resolved within one year, under the new norms.
The new regime, proposed by the National Institute for Transforming India (NITI) Aayog, will ensure that projects are not stalled, and the developer and its projects do not suffer from lack of funds till the dispute is resolved.
There is estimated total amount of arbitration tied up stood at Rs 7000 crore. During the next 12 to 18 months, about 40 percent of the amount would be secured from the sanctioned arbitration amount. As per the industry experts, infra companies may expect their debt size to get reduced in the range of 40 per cent to 50 per cent in future term. And it already has started happening with the classic case of Patel Engineering. The list of companies which received nod from Government for debt arbitration are as follows:
Hindustan Construction Company: The company’s debt could be halved from Rs 4900 crore within 12-14 months. The company has over Rs 3200 crore tied up in arbitration. As per new norm its Rs 2400 crore can get freed immediately.
Reliance Infrastructure: It has Rs 14000 crore stuck under various stages of arbitration for various projects. This will help revive stalled projects which suffered due to long settlement periods.
SPML Infra: The company has a debt of Rs 540 crore and around Rs 500 crore are stuck in arbitration.
Patel Engineering: The company has won arbitration award of Rs 2500 crore. Further claims of about Rs 5000 crore are in arbitration process. New norm will help the company to reduce debt by 55 to 60 per cent.
The Reserve Bank of India's (RBI) new restructuring tool –Scheme for Sustainable Structuring of Stressed Assets (S4A) has initiated many new discussions on how banks can take equity in debt laden firms. While S4A aims to achieve dual objective i.e. help banks deal better with stressed assets and help debt-laden companies get their projects back on track.
Given the disappointment around the strategic debt restructuring (SDR) process, it is evident that the banking sector has been struggling for sustainable solutions around the alarming non-performing asset (NPA) situation. Given the situation, new S4A guidelines would ease infrastructure companies in future term. The approach seems to be focused on restricting dependence on subjective elements, such as futuristic cash flow projections, to arrive at sustainable debt levels.
The root cause for incremental of debt in infrastructure sector due to delayed clearances and approvals, swollen capital expenditure numbers to cover up for equity funding. The list of another causes includes excessive leverage based on aggressive growth assumptions, overall economic slowdown, lack of promoter bandwidth to bring in equity besides industry specific issues such as fluidity in fuel supply arrangement and power purchase agreement off-takes, dispute resolution with the National Highways Authority of India (NHAI).
The S4A scheme is only applicable to operational projects, which means the larger section of the stuck or under-construction projects or the ones which need last-mile funding, will not be benefitted. This unaddressed segment of projects may actually be a significant portion of the NPAs in the infrastructure sector specifically in the power and the highways sectors.
Glance of First Quarter Results
We have considered numbers of 274 companies from the infrastructure space. The top line increased by 7.76 per cent as of Q1FY17 as compared to same period in the previous financial year. Its cost of raw materials remained flat and increased by just 0.99 per cent in Q1FY17 on yearly basis. Infrastructure companies’ operating profit rose by 16.34 per cent as compared to same period in previous fiscal year. The sector’s other income too increased by 26.66 per cent in Q1FY17 on a year on year basis. Its net loss has narrowed down to Rs 121 crore in Q1FY17 from Rs 1421 crore in Q1FY17.
On quarterly comparative front, infrastructure sector’s revenue dropped by 13.78 per cent in Q1FY17. Its raw material cost declined by 9.91 per cent in Q1FY17 as compared to the previous quarter. Meanwhile, the sector’s operating profit also reduced by 12.28 per cent in Q1FY17 on a quarterly basis. Its other income increased by 7.38 per cent in Q1FY17 as compared to the previous quarter. Infrastructure sector posted net loss of Rs 121 crore against net profit of Rs 2193 crore in Q4FY16.
New Norms
InvIT is basically an infrastructure investment trust through which infra companies can raise money. This money raised for their operational projects will be tax-free. These Trusts will be held by the companies and the Trust will be holding the special purpose vehicle (SPVs).
REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock. REITs provide investors an extremely liquid stake in real estate. They receive special tax considerations and typically offer high dividend yields.
Regulatory body SEBI is likely to ease out regulations for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) during the second half of September. Both will take off from the current financial year. SEBI came out with regulations for REITs and InvITs in 2014. However, not a single Trust has been set up as yet as investors wanted further measures, including tax breaks to make these instruments more attractive. It has taken a full two-year time since the path was cleared for REITs and InvITs could list.
According to SEBI, there are multiple applications received for REITs and InvITs. IRB Infrastructure has become the first company to file a draft red herring prospectus (DRHP) to raise Rs 4300 crore for an InvIT.
REITS and InvITs facilitate the following:
Benefits to Developers
An increase in entry and exit opportunities for developers, asset owners and financial investors, enabling them to monetise their assets (real estate or projects)
Availability of last-mile funding for stalled projects
Transformation of business from an asset-heavy to asset-light model
Focus on core competencies, and segregation of operations and infrastructure
Benefits to Investors
Facilitation of easy entry and exit in the real estate sector
Small retail investors able to participate in asset classes that are normally unaffordable for them
Diversification of investment holdings enabled to help financial and strategic investors manage risk
Core Infrastructure Growth
Growth in eight core infrastructure sectors of the economy slowed down to 3.2 per cent in July from 5.2 per cent in June, primarily due to a decline in growth in steel sector. Cement, electricity and fertiliser sectors recorded a slower growth in July from previous month, while natural gas and refinery products showed an improvement. As per available data, the growth of the eight core sectors during April-July, the first four months of current financial year, was 4.9 per cent.
Conclusion
From historical point of view, BSE India Infrastructure index has not outperformed. The BSE India Infrastructure has given 11.06 per cent during last two and half years. Meanwhile, BSE Sensex given 17.27 per cent returns to investors during the same time.
The infrastructure sector is poised to grow tremendously and while the government has strived to provide ‘exemplary’ and ‘proactive’ steps to boost this sector. However, there are various challenges and regulatory uncertainties. The recent initiatives which will boost operational efficiency in infrastructure companies and investment in the sector.
Recommendations
The boost in the infrastructure segment is on the backing of various measures taken by government, RBI and companies as a whole. If we consider infrastructure space, then the growth will be revived starting from cement, construction materials till main stream business of construction. The drastic reduction of debt will increase companies interest coverage ratio, net working capital days, debt to equity ratio in upcoming quarters. Operational efficiency of such companies will boost profitability margins and money flow back into the business. We charted out some of the picks from sector which will have more traction in upcoming quarters.
ITD Cementation India
BSE Code: 509496
FV: 1
CMP: 142.8
Market Cap: Rs 1064 crore
ITD Cementation India is involved in construction and civil engineering. The company is engaged in construction of a range of structures, which include maritime structures, mass rapid transport systems (MRTS), airports and other foundations.
On financial front, ITD Cementation’s revenue increased by 42.28 per cent to Rs 1876 crore in H1CY16 as compared to the same period in the previous financial year. Its EBTDA also rose by 30.37 per cent to Rs 108 crore in H1CY16 on yearly basis. ITD Cementation posted net profit net profit of Rs 28.23 crore in H1CY16 against net loss of Rs 93.52 crore in H1CY15. The company incurred exceptional loss of Rs 122.75 crore during H1CY16.
ITD Cementation’s top line increased by 79.2 per cent to Rs 3069 crore in CY15 as compared to previous financial year. The company’s EBITDA rose more than double to Rs 192 crore in CY16 on a yearly basis. It posted net loss of Rs 59.31 crore in CY15 against net profit of Rs 19.41 crore in CY14. ITD Cementation has healthy debt to equity ratio of 1.18 as of CY15.
As of H1CY16, ITD Cementation has order book of Rs 4435.2 crore comprising 41 per cent from private, 39 per cent from government and remaining 20 per cent from Public Sector Undertakings. The company will execute its orders over 20 months. The company’s order book is widely spread across sectors like 19 per cent from hydro/dams/tunnels/irrigation, 11 per cent from urban infrastructure/ MRTS, 49 per cent from marine, 3 per cent from specialist works, 3 per cent from industrials, 6 per cent from buildings, 9 per cent from highways, bridges and flyovers.
Housing Development & Infrastructure
BSE Code: 532873
FV: 10
CMP: 101
Market Cap: Rs 2707 crore
Housing Development and Infrastructure (HDIL) is engaged in real estate development and construction of residential and commercial properties, infrastructure facilities and other related activities. Its commercial projects comprise premium office spaces, as well as multiplex cinemas. It also has a multiplex business, which operates under the brand name Kulraj Broadway. HDIL has around five operational multiplexes.
On financial front, HDIL’s revenue declined by 2.31 per cent to Rs 261 crore in Q1FY1 as compared to same period in previous financial year. Its EBITDA too reduced by 17.37 per cent to Rs 157 crore in Q1FY17 on yearly basis. HDIL’s EBITDA margin contracted by 1101 basis points to 60.15 per cent in Q1FY17 as compared to same period in previous fiscal year. The company’s net profit declined by 29.98 per cent to Rs 40.96 crore in Q1FY17 on yearly basis. Its net profit margin contracted by 622 basis points to 15.71 per cent in Q1FY17 as compared to same period in previous financial year.
HDIL’s top line increased by 14.71 per cent to Rs 1154 crore in FY16 as compared to previous financial year. However, the company’s EBITDA declined by 2.58 per cent to Rs 785 crore in FY16 on yearly basis. Its bottom line rose by 21.68 per cent to Rs 266 crore in FY1 as compared to previous fiscal year. HDIL is maintaining lower debt to equity ratio and remained at 0.27 as of FY16.
On valuation front, HDIL’s share price is trading at PE multiple of 16.46x times as compared to industry PE multiple of 24.86x times. The scrip is trading attractive as compared to peers such as Mahindra Life Developers (15.28x), Purvankara Projects (17.65x), Ahluwalia Contracts (India) (24.71x).
KCP
BSE Code: 590066
FV: 1
CMP: 95.55
Market Cap: Rs 653 crore
KCP is in business of cement, engineering, power and others. The company's segments include engineering, cement, power, sugar and others. Its other businesses include mining, mineral processing, metals, oil and gas, chemical and fertilisers, space and industrial gases.
On financial front, KCP’s revenue decreased by 12 per cent to Rs 182 crore in Q1FY17 as compared to the same period in previous financial year. The company’s EBITDA also reduced by 44.77 per cent tot Rs 30.40 crore in Q1FY17 on a yearly basis. It posted net profit of Rs 3.28 crore in Q1FY17 against net profit of Rs 34.18 crore in Q1FY16.
On yearly front, KCP’s top line has increased by 9.12 per cent to Rs 1296 crore in FY16 as compared to previous fiscal year. The company’s EBITDA too rose by 42.86 per cent to 237 crore in FY16 on yearly basis. Its EBITDA margin expanded by 431 basis points to 18.26 per cent in FY16 as compared to previous financial year. KCP’s bottom line also boosted by 85.33 per cent to Rs 93.35 crore in FY16 on yearly basis. The company’s debt to equity ratio stood at 0.78 as of FY16.
KCP has decided to expand the production capacity of its cement unit located at Muktyalaa in Krishna district Andhra Pradesh, from 1.8 MTPA to 3.5 MTPA with an expected outlay of Rs 400 crore.
On valuation front, KCP is trading at PE multiple of 13.11x times as compared to peers such as Birla Corporation (19.86x), OCL India (17.7x), The Ramco Cement (22.72x). The company’s PE is trading attractive PE multiple as compared to industry PE multiple at 47.19x times.
PNC Infratech
BSE Code: 539150
FV: 2
CMP: 125
Market Cap: Rs 1088 crore
PNC Infratech is an infrastructure construction, development and management company, with expertise in execution of major infrastructure projects, including highways, bridges, flyovers, airport runways, power transmission lines, development of industrial areas and other infrastructure activities.
PNC Infratech’s order book stood at Rs 5100 crore in Q1FY17. The company also secured highway project of NHAI on hybrid annuity model for bid project cost of Rs 881 crore, road project of UP-PWD for a contract value of Rs 233 crore and airport runway project of MES at Lucknow for a contract value of Rs 140 crore during July 2016
On financial front, PNC Infratech’s revenue declined by 6 per cent to Rs 635 crore in Q1FY17 as compared to same period in previous financial year. The company’s EBITDA increased by 25 per cent to Rs 166 crore in Q1FY17 on yearly basis. Its EBITDA margin expanded by 660 basis points to 26.1 per cent in Q1FY17 as compared to same period in previous fiscal year. PNC Infratech’s PAT also boosted by more than two times to Rs 54.2 crore in Q1FY17 on yearly basis. The company’s PAT margin expanded by 520 basis points to 8.5 per cent in Q1FY17 as compared to the same period in the previous financial year.
On yearly front, PNC Infratech’s top line increased by 29 per cent to Rs 2395 crore in FY16 as compared to previous financial year. The company’s EBITDA too rose by 46 per cent to Rs 407 crore in FY16 on yearly basis. Its PAT boosted more than double to Rs 229 crore in FY16 as compared to previous fiscal year. PNC Infratech’s net working capital days is reducing from last five years from 128 days in FY12 to 92 days in FY16.
Ramco Industries
BSE Code: 532369
FV: 1
CMP: 167
Market Cap: Rs 650 crore
Ramco Industries manufactures Fiber Cement (FC) sheets and Calcium Silicate Boards (CSBs). The company's focus segments are building products, textile and power generation from wind mills. It operates approximately 10 wind mills with a total installed capacity of approximately 16.73 megawatts (MW). Its cotton yard division produces approximately 30.54 lakh kilograms of cotton yarn per year.
On financial front, Ramco Industries’ revenue increased by 0.3 per cent to Rs 234 crore in Q1FY17 as compared to same period in previous financial year. On segmental revenue front, the company earned 80.97 per cent from building products, 8.17 per cent from textiles and 10.86 per cent from windmills during Q1FY17.
Its EBITDA too rose by 59.6 per cent to Rs 35.4 crore in Q1FY17 on yearly basis. Its EBITDA margin expanded by 562 basis points to 15.13 per cent in Q1FY17 as compared to same period in previous fiscal year. Ramco Industries’ net profit boosted more than four times to Rs 32.49 crore in Q1FY17 on yearly basis.
Ramco Industies’ top line increased by 0.85 per cent to Rs 902 crore in FY16 as compared to previous financial year. The company’s EBITDA too rose by 0.12 per cent to Rs 85.44 crore in FY16 on yearly basis. Its bottom line also boosted by 59.69 per cent to Rs 57.84 crore in FY16 as compared to previous fiscal year.
On valuation front, Ramco Industies’ share price is trading at PE multiple of 7.99x times against industry PE multiple of 47.19x times. The company’s PE is trading attractive as compared to peers like Aro Granite Industries (11.8x), Gujarat Borosil (40.74x), Divyashakti Granite (11.88x).