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Why Infrastructure Stocks Are Falling

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Shares of infrastructure companies have tumbled this year. Concerns range from project financing to macro risks in an election year, brokerages Nomura and Citi said.

The stocks of companies including Dilip Buildcon Ltd., NCC Ltd., KNR Constructions Ltd. are down 20-40 percent in 2018. That compares with a nearly 5 percent gain in the benchmark Nifty 50. Most of the stocks trade at a sharp discount to their two-year price-to-earnings multiple.

Here’s a look at the concerns and what’s working for the infrastructure firms:

Project Financing Risk

Working capital and project financing needs of companies are largely met by state-run banks that are reeling under mounting bad loans. Lower appetite for infra financing by banks and rising interest rates are impacting the outlook of these companies, Nomura said.

Big Chunk Of Business With A Few Players

Top seven companies got 40 percent or Rs 50,000 crore worth of the fresh contracts awarded by value from the National Highway Authority of India in the year ended March, according to data compiled by BloombergQuint. That could pose incremental equity funding risk.

Brokerages are optimistic though. India awarded road contracts for a record 17,055 km in the previous financial year. Nomura expects the momentum to continue after the usual lull in the first half.

Project Awarding Momentum

In April-June, a total 892 kilometres were awarded, according to data provided by IIFL Private Wealth. Though the Ministry of Road Transport and Highways missed the targets couple of times earlier, 20,000 kilometres in FY19 seems to be realistic, it said.

Upcoming elections and with a focus to achieve target set by the Bharatmala program, awarding needs to be robust in FY19, IIFL said. With the success of toll-operate-transfer model and higher budgetary allocations, the ministry is in a much better position to acquire the required land and award large projects, the brokerage said.

Faster Construction Pace

The pace of road construction has improved over the past three years. Citi expects the pace to shoot up to 32 km a day by March 2020 compared with 27 km a day. 2,345 km of roads were constructed in the quarter ended June compared with 2.260 km in the year-ago period.

ToT Boost

The government’s first highway monetisation programme through the toll-operate-and-transfer model fetched the highest bid of Rs 9,700 crore against the estimated Rs 6,300 crore, according to IIFL. Funding for Bharatmala through this route will be higher than the earmarked 5 percent of Rs 6,900 crore requirement, it said.

While the government initially expected to raise an estimated Rs 34,000 crore in four years through March 2022, the actual mop-up could be higher, IIFL said. That would ease pressure on the National Highway Authority of India’s balance sheet and allows smooth execution, the brokerage said.

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