The Hindu Business Line : Construction cos up on performance hopes

CONSTRUCTION companies, in particular, mid-cap construction companies were the flavour of the day with the stocks such as IVRCL Infrastructure and Projects, Nagarjuna Construction Company, Hindustan Construction Company, Gammon India, Era Constructions, Simplex Concrete Piles etc. seeing a sharp upsurge on the bourses.

While the sector stocks have been re-rated on the bourses on pure fundamentals, the current interest appears to stem from the belief that on the numbers front there would be no surprises, that these companies would beat their guidance.

On an individual basis, there is a perception that the interest at the IVRCL counter is more of an IPO build up. IVRCL had some time ago announced its decision to raise Rs 150 crore via a rights issue by end of FY05.

Rumours that the company plans to raise capital through the private placement route are said to be keeping interest alive at the counter of Nagarjuna Construction. The fact that Nagarjuna bagged a few more orders, thereby, beefing up an already strong order book, was but an additional incentive.

Sources said that going forward, these factors would be responsible for a further upside at these two counters.

For the sector as a whole, a positive news flow given the build up in the road, power, port and other infrastructure related projects, is expected to translate into a significant revenue growth.

Analysts bullish on the sector maintain that the growth in these companies would be at a CAGR of more than 20 per cent over the next 2-3 years.

However, the general optimism apart, there is a belief that the run up has been too soon, too sharp at some of these counters.

For instance, Nagarjuna, which was quoting at around Rs 175 levels as on August 2, has since more than doubled to it current levels of Rs 318 on the bourses. The stock hit the circuit on Tuesday, ending the day 10 per cent higher at Rs 317.90 on the BSE.

IVRCL has appreciated from around Rs 198 levels as on August 2, to Rs 246 today. Similarly, HCC, which had been ruling at around 146.85 levels as on August 2, is ruling at around Rs 243today on the BSE.

"There is no denying the fact that this sector, the stocks have been undervalued for a long time. But valuations are not so very attractive at these levels. In fact there has been more than a 30-50 per cent run up in select stocks in the recent past," said an analyst tracking the sector. Today, analysts believe it is more of a long -term call.

A small section of the market also feels that the current optimism on the sector is not justified.

"It is a high capital-intensive business, which will see companies always under pressure to expand their balance sheet size and net owned funds," said a market source. Yet analysts argue that the high capital output ratio and huge growth potential more than make up for the other drawbacks.

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