Analysis Overview – Since Mr. Narendra Modi assumed power, the NIFTY Infrastructure index has declined by 16% and Larsen and Tubro has declined by 17%. The index and the stock indicate that infrastructure sector investment has been sluggish. The chart below gives the returns for the infrastructure index, L&T and NIFTY since May 2014. Clearly, the infrastructure sector has significantly underperformed the broader index. However, I see this underperformance as an opportunity to buy quality names in the sector.
The Silver Lining – The pace of reforms under the BJP government has been slower than expected, but reforms are moving in the right direction. The “Make In India” initiative, “Smart City” initiative and renewed focus on the infrastructure sector in budget 2015-16 is likely to translate into higher orders for infrastructure companies in the foreseeable future.
The Defence Sector Game Changer – In a recent interview with CNBC-TV18, JD Patil, Senior VP and Head of Defence and Aerospace at L&T said that the company hopes for the order book to grow up to Rs 50,000Crore in the next three years.
One Trillion Investments Needed – Mr. Nitin Gadkhari recently commented that the country requires $1 trillion for the development of new roads, ports and airports over the next few years. If this translates into actual investments in the next 3-5 years, infrastructure sector companies will see significant swelling of order book.
Lower Interest Rates – The infrastructure sector needs significant capital infusion and investments are through a mix of debt and equity (higher debt at times). With India’s inflation under control and with the RBI likely to cut rates further in 2016, the infrastructure sector has an additional positive trigger in the form of lower cost of debt.
Conclusion – The infrastructure sector has been depressed and I see attractive valuation in the sector if investors are willing to hold a stock with a time horizon of 3-5 years. Larsen and Tubro is likely to benefit significantly from the big investments in the sector in the coming years. I am positive on L&T and I see the underperformance as an opportunity to accumulate for long-term.