Proposed Rs 100 lakh cr expenditure puts infra sector in spotlight; L&T, Mahindra among 10 stocks in focus

To achieve the $5 trillion economy target, the government, earlier this year, constituted a high-level task force earmarking Rs 100 lakh crore for infrastructure projects by 2024-25.

The task force, headed by the economic affairs secretary, will draw up a ‘National Infrastructure Pipeline’ of Rs 100 lakh crore, the finance ministry said in a statement. This would include greenfield and brownfield projects costing above Rs 100 crore each.

The infrastructure sector has a big multiplier impact on the economy and experts feel that select stocks in the sector are likely to hog the limelight. However, for India to achieve its target of $5 trillion, economy might need participation from the private sector as well.

“This Taskforce basically has a duty to identify and initiate projects that are technically viable and also economical. The government will also try to have those projects on priority which will accelerate job growths and will also show some rural connection where distress of income is high,” Pritam Deuskar, Fund Manager, Bonanza Portfolio Ltd told Moneycontrol.

“Majority of these will be in Road projects that will connect first to industrial corridors and B group cities. We believe L&T, Dilip Buildcon, and KNR Construction can benefit from these road projects,” he said.

Also, approximately 500 cities need to be connected for water supplies but there could be technical challenges too and also job creation and employment in infra projects and thereby in companies in Industrial MIDCs, business bays and SEZs become a priority.

“Cement companies like UltraTech can also have good benefit from these projects. There will be affordable housing companies indirectly benefiting from these developments,” added Deuskar.

The road to reach $5 trillion economy would be a combination of growth in domestic consumption, private capex, government capex and exports, suggest experts.

“Domestic consumption, private capex, govt. capex and exports are not mutually exclusive. Capex has a multiplier impact on domestic consumption as well. With slowing down of domestic consumption and global trade wars hurting Indian global trades, key expectation for immediate GDP growth is on capex revival in the economy,” Shailendra Kumar, Chief Investment Officer – Narnolia Financial Advisors told Moneycontrol.

“With low capacity utilisation levels for most of the private sector companies, all eyes are on the government measures for demand revival including infrastructure investments,” he said.

Here is a list of the top 10 brokerage bets in the infrastructure space post June quarter results, with an investment horizon of 1 year:

Brokerage Firm: Angel Broking

KEI Industries Ltd: Buy | Target Rs 556

KEI Industries current order book (OB) stands at Rs 4,414 crore (segmental break-up: out which EPC is around Rs 2,210 crore and balance from cables, substation & EHV). Its OB grew strongly in the last 3 years due to strong order inflows from State Electricity Boards, Power Grid, etc.

KEI’s export (FY19 – 16 percent of revenue) is expected to reach a level of 20 percent in the next two years with higher-order execution from current OB and participation in various international tenders.

Angel Broking expects KEI to report net revenue CAGR of 15 percent to Rs 5,632 crore and net profit CAGR of 22 percent to Rs 269 crore over FY2019-21E.

GMM Pfaudler Ltd: Buy | Target: Rs 1570

GMM Pfaudler Limited (GMM) is the Indian market leader in glass-lined (GL) steel equipment used in corrosive chemical processes of agrochemicals, specialty chemical, and pharma sector.

The company is seeing strong order inflow from the user industries which is likely to provide over 20 percent growth outlook for the next couple of years.

GMM is likely to maintain the over 20 percent growth trajectory over FY19-21 backed by capacity expansion and cross-selling of non-GL products to its clients.

Shriram Transport Finance: Buy | Target: Rs 1385

Shriram Transport Finance (SHTF’s) primary focus is on financing pre-owned commercial vehicles. Angel Broking expects AUM to grow at CAGR of 13 percent over FY2019-21E led by pick up in infra/ construction Post 2019 elections, macro revival and Ramping up in rural distribution.

Angel Broking expects STFC to report RoA/RoE to 2.7%/17.6% in FY2021E respectively. At CMP, the stock is trading at 1.2x FY2021E ABV and 6x FY2021E EPS, which the brokerage firm believes is reasonable for a differentiated business model with return ratios.

Jindal Steel & Power Ltd: Buy | Target: Rs 250
The company has increased its crude steel capacity more than double in the last five years from 3.6 MTPA to 8.6 MTPA and currently running at ~65 percent utilization.The brokerage firm expects 515MW of PPA from NHPC currently, JPL emerged as an L1 bidder. JSPL is trading at an attractive valuation to its peer, we value the stock based on the asset-based approach of Steel segment on EV/Tone basis and Power segment on EV/MW basis.

M&M Ltd: Buy | Target: Rs 724

M&M is an India-based company, operating in nine segments: automotive, farm equipment, IT services, financial services, steel trading & processing, infrastructure, hospitality, Systech and Others (comprising logistics, aftermarket, two-wheelers, and investment).

Angel Broking expects M&M to report healthy top-line and bottom-line growth over long period mainly due to healthy growth in automobile segment like Utility Vehicles (on the back of new launches and facelift of some models) and healthy growth in Tractors segment driven by strong brand recall and improvement in rural sentiment.

Brokerage Firm: Sharekhan

L&T: Buy | Target: Rs 1765

L&T’s strong order backlog and healthy bidding pipeline provide comfort on achieving a 14 percent CAGR in consolidated net earnings over FY19-FY20.

Sharekhan believes that L&T, being a quasi-domestic infrastructure play, is expected to benefit over the next five years, as the incumbent government envisages Rs. 100 lakh crore investments in infrastructure till 2024. It fine-tuned their estimates for FY20-FY21E.

IRB Infrastructure: Buy | Target: Rs 150

Sharekhan believes that the induction of GIC as a financial partner for IRB resolves key issues of high leverage and easing of funding requirement of under-construction projects.

On account of the removal of key hangovers mentioned above and improved growth outlook, we upgrade the stock to a buy with an unchanged target of Rs 150.

The Ramco Cements: Buy | Target: Rs 870

Sharekhan has fine-tuned our estimates for FY20-FY21 factoring in a marginal improvement in operating margins during FY20-FY21E on the back of strong pricing growth witnessed in Q1FY20.

Ramco is well-placed to benefit in catering to the incremental demand emanating in Southern India with capacity expansions lined up.

UltraTech Cements: Buy | Target: Rs 5000

Sharekhan has raised its net earnings estimates for FY20-FY21 factoring in a better pricing environment and improving the profitability of acquired units.

The brokerage firm continues to believe that UltraTech, being a market leader, will benefit from the government’s focus on infrastructure and affordable housing segments.

KNR Construction: Positive | Target Rs 293

Sharekhan expects that an improvement in execution, receipt of appointed dates for the remaining projects and a likely betterment in sector outlook from H2 FY20 onwards would enable a re-rating KNR’s valuation multiples.

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