As Modi Triples Spending, India Road Stocks Cheer With 73% Rally

  • Highways outshine power utilities as state generators struggle
  • Road construction target to reach 30 km/day from 13 km/day

Prime Minister Narendra Modi’s decision to triple spending on roads and highways is cheering builders in India, especially the smaller contractors, as he steps up efforts to upgrade the nation’s creaky infrastructure.

A custom index of eight stocks has gained 8.6 percent this year, compared with the 3.3 percent drop in the benchmark S&P BSE Sensex. The gauge has surged 73 percent since Modi’s Bharatiya Janata Party swept to power last May, as construction rebounded fourfold to about 13 kilometers (8 miles) a day. Spending jumped threefold to 350 billion rupees ($5.3 billion) in the April-August period this year, sparking a rally that more than quadrupled the market value of Gayatri Projects Ltd. in 2015.

“Infrastructure is a sector that has high visibility,” said Arvind Gupta, chief financial officer at Mumbai-based J. Kumar Infraprojects Ltd., whose shares have advanced 48 percent. “Any government needs to follow the development mandate. The voter sent a clear signal that she will vote only for someone who will enable development.”

The outperformance of road builders stands in contrast to the nation’s power producers that are grappling with erratic fuel supplies and losses from selling below cost to state-owned distributors. An index of 19 generators has slid 8 percent this year, underscoring the challenge to Modi’s goal of improving public utilities. India is ranked 90 out of 144 by the World Economic Forum for the quality of its infrastructure.

India Road Stocks Surge as Power Utilities Trail
India Road Stocks Surge as Power Utilities Trail

In his first year in office, Modi agreed to fund up to 40 percent of public-private highway projects, fast-tracked forest permits while ensuring that at least 80 percent of the land is in government possession before contracts are given as he tries to unclog some $212 billion of stalled infrastructure projects.

The steps have reduced the risk of projects getting stuck pending land acquisition, a key roadblock in pushing investment, said Vijay Kumar C, an analyst at India Ratings & Research, the local unit of Fitch Ratings.

In August, Modi allowed developers to sell 100 percent stake in completed road projects, a move that would help companies raise money to repay debt or invest in other projects.

Easy to Track

Besides Gayatri Projects, KNR Constructions Ltd. has surged 82 percent this year, while Madhucon Projects Ltd. has more than doubled. Sadbhav Engineering Ltd. is up 23 percent.

“Stocks of smaller road companies with better balance sheets have risen and they will continue to do well due to government’s thrust on the sector,” said Adhidev Chattopadhyay, an analyst at Mumbai-based brokerage Elara Securities India Pvt. “It’s an opportunity for investors as it is comparatively easier to track this sector in terms of bidders and the size of orders.”

Blackouts

On the other hand, a solution to end India’s notorious blackouts isn’t in sight yet. Some areas of the nation, including the most populous northern state of Uttar Pradesh, continue to experience hours of outages during summer when the demand peaks and cash-starved state utilities cut back on electricity purchases.

While Modi’s government has managed to boost fuel output at state-owned Coal India Ltd., lowering the need for costly imports, stressed assets at a 13-year high at Indian banks have made lenders reluctant to take on more risk, stalling other infrastructure projects. Moreover, power distributors are forced to sell below cost to keep tariffs affordable, while delays in government subsidy payments strain their finances.

“Roads and power are both very important segments of infrastructure and would require most of the capital,” said Abhishek Tyagi, a Singapore-based analyst at Moody’s. “In power, distribution companies aren’t able to buy more, leading to poor utilization rates.”

PTC India Ltd. is the worst performer this year on the S&P BSE India Power Index, with a drop of 32 percent, followed by Adani Power Ltd., which has slid 31 percent. Bharat Heavy Electricals Ltd., the nation’s top power-equipment maker, and GMR Infrastructure Ltd. are among the bottom five in the 19-member gauge.

Billionaire Gautam Adani-owned Adani Power may report a record 13 billion rupees loss in the year ending March 31, according to analyst estimates compiled by Bloomberg. GMR Infrastructure Ltd., which gets 41 percent of its revenue from power, may report a loss of 13.8 billion rupees. Earnings at state-owned NTPC Ltd., the biggest generator, may drop to a six-year low in the 12 months ending in March.

Confidence Booster

The Ministry of Road Transport of Highways said in July it plans to roll out $45 billion of projects over the next three years, more than twice the value of contracts given since Modi came to power in May 2014.

The government’s confidence building measures such as the hybrid- and annuities-based projects have helped boost confidence in road builders, according to Nitin Gadkari, the minister for roads. He aims to roll out 30 kilometers a day by the end of 2016.

“I am only going by the government’s planned spending on roads and highway, which has risen threefold,” Sushil Agarwal, chief financial officer at Grasim Industries Ltd., India’s biggest cement maker, said in a phone interview in Mumbai. “Over couple of quarters we will start seeing tangible changes on-the-ground.”

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