Construction and infra stocks up on easier lending rules

Construction and infrastructure stocks are on a roll after being dealt a friendly hand in the Budget and the Reserve Bank setting out the rules for long-term infrastructure lending two days ago.

C&C Constructions, Sadbhav Engineering, ARSS Infra, Patel Engineering, Simplex Infra, Punj Llyod, IRB Infra and IVRCL are up between 2 and 3 per cent in trade so far. Still others, such as Madhucon Projects, Ahluwalia Contracts, Pratibha Industries, Simplex Projects and IL&FS Transportation, are up between 3 and 5 per cent.

Financing boost

Choked infrastructure — whether airports, roads, or ports — is hindering growth, with infrastructure development hampered by a combination of delayed clearances, cost overruns, land acquisition problems, and financing problems. The aggregate debt-equity ratio of 42 listed players in this space climbed to 3.6 times in 2013-14 from 2.4 times two years ago. As a proportion to sales, interest cost was up 12 per cent in 2013-14, up from 8 per cent two years ago.

With most infrastructure projects involving long gestation periods, the Budget has spelt out the need for long-term financing for these projects. Up until now, banks’ asset-liability matching rules prevented them from lending for tenures longer than 10 to 12 years.

This resulted in higher payments spread over a shorter term for infrastructure developers (those who invest capital in the project, develop it, and collect revenues for a specified number of years) even though project concession periods are usually at least 15 years.

The Budget proposals which were later supplemented by the Reserve Bank allows banks to work out a flexible repayment structure over long tenures for such projects. It also allows banks to raise funds for lending to the infrastructure sector without regulatory requirements such as CRR or SLR.

Long term only

This can result in lower interest rates and financing terms better designed to meet the sector’s needs. With funding constraints loosened, companies can take on more projects, besides executing them with more ease and speed. This benefit will trickle down to pure construction players as well. It’s no wonder then that infrastructure and construction stocks are partying.

The rain on this parade, however, is that these companies are unlikely to see a reduction in rates in the next few quarters. Banks have, in the first place, to work out the finer details of raising the necessary finance.

The RBI has also capped the amount that banks can claim under the eased rules; only 16 per cent of banks’ existing infrastructure and affordable housing loans will qualify this fiscal. This will gradually increase over the next five years and only by 2020 will all the bonds raised for such lending qualify for regulatory leeway. Benefits for developers will, therefore, come in quite slowly.

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