Wednesday, June 18, 2014

Speedy project clearances can help battered infra stocks
[Editor: In case of IVRCL Ltd (Rs.24.55), after the approval of the CDR Package, the entire picture could change dramatically as the company has an order book of more than Rs.20, 000 Cr and this year too, it bagged orders of around Rs.1000 Cr]
June 17, 2014:  After spending years plumbing ever deeper lows, infrastructure stocks soared in the past year. Nine stocks doubled since the previous Budget and sixteen are up between 50 and 100 per cent. The CNX Infrastructure Index was up 42 per cent in this period, against the Nifty’s 32 per cent.

Budgets over the years have tried to address the trouble of tying up funding at reasonable rates for projects. Initiatives such as setting up infrastructure debt funds, credit guarantees and refinancing options from IIFCL, tax-free bonds, infrastructure bonds, have all been rolled out.

Addressing funding
But apart from tax-free bonds, other initiatives haven’t met with much success. Funding remains one of the biggest hurdles for infrastructure and construction companies. For FY14, aggregate interest costs for these players were up 31 per cent, against a 7 per cent growth in revenues.

As a result, net profits collectively dropped 77 per cent in the 2013-14 fiscal. Companies such as Pratibha Industries and Sadbhav Engineering have seen interest outgo rise by over 50 per cent coupled with a drop in interest cover. 

IVRCL, BL Kashyap, CCCL, and Punj Lloyd have interest covers of less than one time. More than half the companies have debt-equity ratios over 2 times.

Higher budget allocations have been made towards roads, ports, airports, rail connectivity, industrial corridors, and the like, but it hasn’t translated into a stream of fresh orders for companies. Pace of sales growth is therefore slow. Apart from a handful of companies such as Larsen & Toubro, Sadbhav Engineering and MBL Infrastructure, others have seen sales grow at less than five per cent in the recently ended fiscal.

Steps to speed up clearances are now underway, which can help improve execution. This can also shorten working capital cycles, in turn reducing short-term funding requirements.

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