Infra stocks take a beating on slowing order inflows

Despite being one of the worst performing sectors since the March 2009 revival, infrastructure's stocks have only been further hammered in the market correction in 2011.

About 45 mid- and large-cap stocks in the infrastructure and construction space have declined by 26 per cent on an average.

This is much worse than the 8 per cent decline witnessed by the Sensex from January till date.

Policy concerns

Stocks of Patel Engineering, Unity Infraprojects, Punj Lloyd and IVRCL Infrastructures and Projects declined between 40 and 53 per cent between January and now.

Large conglomerates such as Larsen & Toubro and GMR Infrastructure were no exception to this trend, declining between 20 and 36 per cent.

While liquidity crunch was a key factor for these stocks, slowdown in order inflows in a good number of companies has resulted in the stocks from this sector being de-rated in the market.

According to a recently published report on the sector by Saion Mukherjee and Harish Venkateswaran of Nomura Financial Advisory and Securities (India), the slowdown in order inflows has emerged as a concern area for the construction sector. The report states that delays in policy decisions on the part of the government has to an extent impacted order inflows in sectors such as power and roads.

The brokerage expects a slippage of 5-40 per cent in the order inflow guidance initially given by companies under their coverage.

With several State elections round the corner and talk of yet another Cabinet reshuffle, the slowdown in orders may not improve anytime soon.

States have emerged as major investors in infrastructure in the Eleventh Five-year Plan. They are expected to spend Rs 1.41 lakh crore or 51 per cent of the investment in roads and bridges in the Eleventh Plan (revised projections) as against 32.6 per cent by the Centre (rest being private investment).

Policy lull during State elections could be one reason for the trickling order flows, which are otherwise high in the March quarter.

Take the case of Hindustan Construction. The company saw order inflows of Rs 2,685 crore for the nine months ending December 2010 as against its initial guidance of Rs 9,000 crore. The stock declined 26 per cent since January. High dependency on segments such as road and hydro power which are typically fraught with delays has hit order inflows for the company.

Others such as IVRCL which have traditionally held high exposure to irrigation were also hit by political issues lingering in the largest irrigation spending state — Andhra Pradesh.

Earnings visibility

Lower order inflow implies reduced earnings visibility for construction companies. The de-rating of the stocks in the market by bringing down future price earnings multiple suggests that market has downgraded earnings.

In 2011, IIFL downgraded FY 11-13 earnings estimate of construction contractors by 4-15 per cent. The brokerage too cited delays in requisite clearances and tight state budgets as issues troubling the sector.

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