The infrastructure drive of India Inc.

Advantage India

Commenced in 1998-99, the Indian infrastructure drive spelt a lot of good for the Indians. Ostensible ones are faster, comfortable journeys, safer travel, and lower maitenance, fuel, and logistic costs. But there were lot of intangibles that were tagged along. These include the increase in employment rate and in turn increase in the per capita income, augmentation to the GDP (construction industry alone accounts for about 7% of the GDP) and a steady increase in FDI and FII investments.

Company's benefit too

Construction companies had a lot to cheer as well. Picture this. Two years ago, a spate of leading companies such as Nagarjuna Construction, IVRCL Infrastructures were trading at a PE (price as a proportion of earnings) multiple of about 3 to 4. Now, almost all the construction companies are trading at a PE multiple of over 20; valuations that were only garnered by the behemoths like Larsen & Toubro. One may argue that this across the board revaluation is due to the buoyancy in the stock markets. A closer picture, however, reveals a different story. In the past, construction companies were plagued with issues related corporate governance and window dressing. Now, driven by the investments made by agencies such as the World Bank and ADB in the Indian infrastructure, particularly the roads, the order book of these companies have swollen substantially. Some of these companies have strong order books to beget stable revenues for the next two years even if they don’t get any more orders.

Will it sustain?

The question is will these companies continue to sustain such superior valuations? The answer is yes. At least for the next one year, in the wake of the recent budget proposals. However, given that most of the road projects will come to an end by 2007-08, these companies will soon should start to seek their fortunes elsewhere. Perhaps, the probable second phase of the infrastructure drive, (Development of ports, Airports, Irrigation, interlinking of rivers etc) should help their cause. However, most of these proposals are still in the conception stage and nothing concrete has emerged so far.

Madhan Gopalan

The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.