A fruitful year ahead?. Infrastructure: Awaiting the big push

The push towards improving infrastructure has been in small but significant steps — clearing the logjam of stalled projects, relaxed financing, deferring premium payments for road projects and such. And stock prices have already reacted wildly. MBL Infra, Sadbhav Engineering, IRB Infra and Ashoka Buildcon gained two to five times in 2014. JSW Energy and PTC India gained 81 and 44 per cent.

Expectations of demand revival in infrastructure as well as housing sent cement stocks through the roof, with mid-cap players outperforming larger peers. But then, fundamentals are yet to catch up. While several factors can drive infrastructure and allied sectors, a lot hinges on the promise of reforms turning into reality.

Financing rules Recent changes to infrastructure financing rules will be the biggest driver for these companies. One, banks can now raise funds tailored to the long-term gestation period of infrastructure projects. Two, payment flexibility in financing was extended to ongoing projects a few weeks ago. The benefit of these moves will play out in the next few quarters. A cut in interest rates will also help as these costs currently swallow 13 per cent of sales of 41 construction and infrastructure companies. The average debt-equity ratio, though, will remain high (as of FY14, debt-equity of these companies stood at 3.24 times).

A more efficient bidding system besides faster environment and other local clearances can speed up project execution. If the relaxation in land acquisition rules holds, it can shorten time-frames and reduce project costs. The coming year should also see projects in railways, ports, and roads, freight and industrial corridors picking up steam. Still, companies are struggling with working capital funding and execution hiccups. While price trends of some raw materials such as steel and bitumen are favourable, others such as cement and labour can rise. Larsen & Toubro, IRB Infra, Sadbhav Engineering, Adani Ports and Gujarat Pipavav are pricey at 18 to 26 times trailing earnings. But they have relatively healthy balance sheets, a strong or diversified order book and execution strength, and can fare well.

Power The Supreme Court’s cancellation of all but four coal block allocations made between 1993 and 2008 saw the stock of steel and power producer Jindal Steel and Power (JSPL) take a massive hit. Among JSPL’s cancelled blocks were the ones feeding its 2,800-MW power plant. With supplies from Coal India already falling short of the existing demand from power producers, the large-scale coal block de-allocation in September only added to the uncertainty on fuel. Now, with the e-auction process set in motion, there could be some reprieve. Those having lost their captive blocks have a chance to win them back, at a price. With the Government permitting even those without power purchase agreements to participate in the auctions, companies such as JSW Energy, with large exposure to the merchant market, can gain access to captive fuel.

Unremunerative tariffs While a large number of power companies continue to suffer from inadequate fuel supplies, some, such as Tata Power and Adani Power, have been dragged into the red due to unremunerative tariffs for power generated by their plants using imported coal. A favourable decision by the Appellate Tribunal for Electricity can revive the fortunes of these companies.

Cement For the allied cement sector, all-India cement production in the September quarter was up about 10 per cent, compared with a growth of 5.7 per cent in the same quarter last year. Production growth was 9.5 per cent in the June quarter and 1.2 per cent in the March quarter. The new fiscal could see the prospects of cement companies improving.

Given several government initiatives and a likely rate cut, the capex cycle and housing demand is expected to revive.

The fall in oil and coal prices will help improve profitability; freight and fuel costs make up 40-50 per cent of the total operating costs. Capacity utilisation should also improve (currently 65 per cent), giving players with a strong regional presence good pricing power.

Higher realisations, on top of an increased sales volume, will help profits jump. Grasim Industries is a good bet, given the improving fundamentals of its VSF business and the positive outlook for subsidiary UltraTech. Prospects are also bright for South-based companies as Telangana and Seemandhra add to their infrastructure.