Infrastructure cos like ITNL, Sadbhav Engg, IRB, others likely to gain from economic revival

Even though infrastructure stocks have attracted high investor interest in recent months, only select companies are expected to do well if an when the economy and business cycle improve.

Companies such as IL&FS Transportation Networks (ITNL), Sadbhav Engineering, Ashoka Buildcon, IRB Infrastructure Developers and MBL Infrastructure could be the early ones to do well operationally once the business cycle revives.

Superior execution skills, ability to raise and fund one’s own projects, and a healthy mix of under-construction and operational projects will give these companies an edge in the coming years.

The roads segment is expected to be the first in the infrastructure sector to see a pick-up in orders. For the current fiscal, National Highways Authority of India (NHAI) intends to award orders for 5,000 km of road through the engineering, procurement and construction (EPC) route. In EPC mode, NHAI pays for the construction of a project.

"Orders are expected to pick up in the second half of this financial year when a new government will be in place," said Deepak Purswani, analyst with ICICI Direct. "A lot of groundwork has been done by the NHAI over the last few months on land acquisition. So, we expect project award to be better in this fiscal than in the previous two fiscals."

Interestingly, this augurs well for companies that have a healthy mix of under-construction and operational projects, as it ensures reasonable cash flows to meet funding requirements. ITNL has nine operational projects and 13 under-construction projects. In these projects, the company has reasonably good exposure to state highways, which distinguishes it from its peers. Through these projects, the company is geographically present in 17 states. This geographic diversification gives it an edge over peers.

"In this fiscal, ITNL may commence operations of seven to eight projects. This will provide cash flows to the company. With this, it can bid for new projects," said Daljeet Kohli, head of research at broking firm IndiaNivesh. These companies refrained from bidding aggressively when activity in the roads sector was at its peak. But, with many infrastructure firms having a stretched balance sheet, the number of bidders may be less than 10 this year. In such a situation, only companies with the ability to raise funds would benefit.

While ITNL raised Rs 525 crore through preferential and rights issue, Sadbhav Engineering plans to raise Rs 125 crore through issue of warrants to promoters. As a result, these companies will be in a good position to secure projects at a reasonable price. On the balance sheet front, most of these companies are not as stretched as their peers. Interest expense as a percentage of net revenues for these companies is in the range of 45%-50%, which is healthy in the industry.