18 Nov, 2008

Infrastructure was once a baby of stock market investors and now it is the most beaten down sector. Throwing out the baby with the bath water adage holds true here. It is correct that the the global finanacial melt down and tightening of money supply  has hit construction and infrastructure companies hard, but does that mean  that  this sector is completely doomed for ever!

India is at the door steps of a revolutionary transformation and the story is not over yet. This current speed bump in the smooth ride to glory can be a golden opportunity to invest in beaten down stocks of companies which are going to shape the infra future of the country.

There are many good companies with good execution capabilities, manageable debt levels and strong order books, going cheap in the stock market crash. These companies will benefit in the long run.

Infrastructure spending in the Twelfth Five Year Plan is estimated at $989 billion ($492 billion in the current plan) indicates robust long-term prospects for the sector. Here are some of the hot stock picks for the long term and patient stock investor

HCC

This compnay has a high debt-equity ratio of 1.6 times, which is why its interest cost went up by 44 per cent in Q2 FY09 (up 33 per cent in first half) against sales growth of 18-19 per cent. Notably, the interest cost was almost 7.6 per cent of the company’s net sales during Q2. However, if interest rates come down, as they have started to, the company should emerge as a beneficiary.

In terms of business, the company generates about 80 per cent of its revenue from projects sponsored by government-owned entities. This is seen in positive light, as it is expected that the flow of orders from the government should start improving, while existing projects could be put on a fast track for completion.

Nonetheless, HCC’s order book continues to be strong. In fact, its order book which had ranged Rs 9,000-10,000 crore for the past few quarters has currently crossed Rs 12,000 crore and is expected to rise further to Rs 15,000 crore by March 2009. The current order book thus, provides good revenue visibility.

In the real estate business, the company has put in place most of the funding needs for its ongoing projects. As per the company, the first phase of its Lawasa township project is already sold and there is still two to three years to go before raising funds for the second phase of work.

While the company is expected to start booking revenues from the Lawasa project in FY09, this project has not been factored in by most analysts in their earnings projections indicating their wait-and-watch approach till the project revenues start reflecting in the numbers.

The stock is currently trading at 10.4 times its FY09 estimated earnings. Investors with some appetite for risk (in light of its real estate exposure) can invest with a long-term perspective.

IVRCL

IVRCL Infrastructures & Projects (IVRCL) is relatively insulated from the rising commodity prices and high interest cost. During FY08, the cumulative rise in commodity prices of steel and cement was about 28-30 per cent. However, the impact on IVRCL’s margins was about 40 basis points; about 90 per cent of its projects have escalation clause allowing it to pass on cost increase to customers.

With respect to leverage, even after its debt nearly doubled to Rs 1,068 crore, the company is relatively better placed given its low debt-equity of 0.69 as on March 2008. However, the increase in debt has started to reflect in financials.

During H1 FY09, the company’s interest cost went up by 432 per cent to Rs 49.8 crore or a little less than a third of profit before tax of Rs 165 crore. Thus, with a decline in interest rates and easing of ECB regulations, the benefits on this count should start reflecting in the ensuing quarters.

The company is a major player in the water and irrigation (about 69 per cent) segments and most of its projects come from the government sector (over 70 per cent in FY08). T