After long, engineering and construction stocks related to basic infrastructure development are seeing some traction in the market. What is bringing investors back to these stocks is the huge bid pipeline seen in road and highways, riding on giant projects like Bharatmala.
Several projects are earnestly in the work, like the Mumbai Trans Harbour Link and Navi Mumbai International Airport, which are moving on a fast pace with construction contracts being awarded.
Recently, the government also kicked off the Mumbai-Ahmedabad bullet train project, which entails huge construction work to build elevated train tracks between the two cities.
The Maharashtra government has also approved two new metro projects-- Thane-Bhiwandi-Kalyan Metro 5 and Swami Samarth (Lokhandwala)-Jogeshwari-Vikhroli-Kanjurmarg Metro 6 corridors, taking the count of metro projects in the Mumbai region to eight, with 172-km network to be built, spending roughly Rs 2 lakh crore.
While contract award is picking up pace and is keeping engineering and construction stocks in the limelight, it’s early days yet for the stocks in this space.
For instance, Larsen and Toubro bagged a major order worth Rs 8,650 crore for the Mumbai Trans Harbour Link, for constructing a 21.8 km bridge connecting Mumbai with Navi Mumbai. But the L&T stock didn’t react so much to this news.
Award of several road projects on an ongoing basis by the National Highway Authority of India and the Bharatmala project, announced on October 24, are big triggers for stocks in this space. Most stocks have moved up in November.
The Union cabinet has okayed 34,800 km highways under the Bharatmala plan. The Centre will invest Rs 5.35 lakh crore in this plan aimed at connecting the country’s economic corridors. Overall, the government will build 83,667 km of roads over the next five years through an investment of Rs 6.92 lakh crore, including the Bharatmala plan, according to Bloomberg.
Mukund Sapre, managing director of IL&FS Engineering & Construction Company, after his company bagged a Rs 582-crore order for four-laning the Amravati-Chikhli section of NH-6 in Maharashtra, said, “The Centre has conveyed its intention, of infrastructure being a key focus area, more than evident just by the number and size of projects announced, which is backed by a relatively structured financing plan as well.”
“Rs 7 lakh crore worth of projects was announced in the roads sector alone, which involves 83,677 km of roads, highways, green-field expressways and bridges to be built in phases. In railways, the government plans to develop metro rail projects in over 30 Indian cities. Metro rail projects worth Rs 2 lakh crore are in various stages of approvals and are likely to come up for bidding within the next five years,” Sapre said.
According to him, “Another emerging sector that has garnered attention of the government and the public alike is the affordable housing space, with the market size of this segment touted to touch the Rs 6-lakh crore mark by 2022, with housing shortage expected to reach 25 million units.
“It is no secret that the engineering and construction companies have had very tumultuous years in the recent past, which left many companies deep in the red…it would not be jumping the gun to say that those companies that survived these few years are on the cusp of a turnaround and take-off on the back of the projects announced by the government and the investment envisaged,” Sapre said.
Some of the top stocks by market capitlalisation in the segment have already reacted to these developments and are seeing positive gains when benchmark indices Sensex and Nifty posted negative returns of about 1 per cent last month.
The Nifty-50 gave a negative return of 1.05 per cent in November, but top and midsized infrastructure development related stocks rallied by 5 per cent to 24 per cent. Small-cap stocks rallied even more given their low valuations.
The top gainers included Sadbhav Engineering (19.74), Ramky Infrastr-ucture (19.41), ITD Ceme-ntation (18.97), Sadbhav Infrastructure (18.65), Ashoka Buildcon (16.79), Bharat Road Network (14.51), NCC (14.32), KNR Construction (10.39), Simplex Infrastructure (6.98), Gayatri Projects (6.97), PNC Infratech (5.49), Patel Engineering (5.29), Shriram EPC (3.5 per cent) and Jaypee Infratech (2.94 per cent).
IIFL Wealth Manag-ement, in an infrastructure sector research report on roads and highways, said, “Post the announcement (on October 24), NHAI has revised its FY18 road award target from 6,500 km to 10,000 km and its project pipeline is worth more than Rs 50,000 crore of projects, bids for which must be submitted by January 2018.
“Although project implementation would be critical given past challenges like land acquisition, the gigantic outlay is a massive business opportunity for developers in this space with average annual road awarding of more than 16,000 km.”
Land acquisition could be the biggest roadblock before infrastructure projects. According to the IIFL report, discussions with most road contractors reveal that land acquisition remains a hurdle even today. Against 16,270 km of projects awarded in FY17, the pace of construction was nearly half at 8,231 km.
Still it is a rare, mammoth opportunity for engineering and construction companies.