Besieged Modi Finds Bright Spot With Road Builders Outpacing SensexRajhkumar K Shaaw and Santanu Chakraborty
Road builders in India have rewarded investors with an average 39 percent gain this year, a rally that is set to continue as Prime Minister Narendra Modi spends more on highways.
A gauge of eight companies, including Ashoka Buildcon Ltd. and Sadbhav Engineering Ltd., has increased 13 times the benchmark S&P BSE Sensex’s 3 percent advance in 2015, data compiled by Bloomberg show.
The roads ministry last week said it plans to roll out $45 billion of projects over the next three years, more than twice the value of contracts given since the government took office in May 2014. Money managers including BlackRock Inc. and Tata Asset Management Ltd. say the progress on unclogging India’s transport links has emerged as a bright spot at a time when other pieces of Modi’s agenda have been stalled by political wrangling.
“The roads sector has seen the maximum amount of reform and award activity since the formation of the new government,” Rohit Singhania, a fund manager at DSP BlackRock Investment Managers Pvt. in Mumbai, said in an interview. “It is better placed than other infrastructure verticals to see a pickup.”
Ashoka and Sadbhav are among the top 10 holdings of the $250 million T.I.G.E.R. Fund managed by Singhania. The fund has beaten 68 percent of its peers in the past 12 months with gains more than double those of the Sensex.
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 are taking hold. The pace of construction has rebounded to 13 kilometers a day from about three kilometers when Modi took over, the ministry’s website shows. Transport Minister Nitin Gadkari said in June he aims to bump up the speed to 30 kilometers within two years.
Getting money for new projects has become easier after the central bank in July 2014 eased reserve requirements for bonds maturing in seven or more years. Lenders sold a record 249.4 billion rupees ($4.6 billion) of notes tied to infrastructure in the year to March, data compiled by Bloomberg show.
Shares of KNR Constructions Ltd., MBL Infrastructures Ltd. and Madhucon Projects Ltd. rallied by 10 percent to 15 percent in July, while Ashoka climbed to a record. Sadbhav closed at a three-month high on Thursday. The gauge of road builders lost 0.1 percent on Friday, while the Sensex fell 0.2 percent.
“There’s potential for further upside,” Rupesh Patel, a fund manager at Tata Asset in Mumbai, said in an interview. “The government is giving contracts and doing the right things to address problems of stuck projects.” Sadbhav and KNR Constructions are among the top holdings in the Tata Infrastructure Fund.
There are risks, of course, to the rally in road builders.
Delays in buying land and securing funds can thwart the government’s roll out target, Rakesh Arora, head of research at Macquarie Capital Securities India, said in an interview.
Opposition parties have stalled Modi’s bid to ease land purchases and overhaul the power sector, lowering investors’ expectations for his government. The Sensex’s 3 percent climb this year compares with a 30 percent rally in 2014.
Some fund managers are worried that valuations have risen too far. Six of eight companies in the Bloomberg gauge trade at an average 25 times projected 12-month profits, compared with the Sensex’s multiple of 15.8.
“The superior earnings growth trajectory over the next two to three years seems to be priced in,” Abhijit Gulanikar, chief investment officer at SBI Life Insurance Co. in Mumbai, said in an interview.
Bulls say the scale of adding to the nation’s 4.8 million kilometer network, the world’s second biggest, is too large to ignore. The government plans to sanction 20,000 kilometers of projects in three years, the ministry said July 30. The target for the year to March 2016 has been set at 8,000 kilometers.
“Even if they do half of that, it will be better than what we’ve seen in the previous years,” Mahesh Nandurkar, a strategist at CLSA Asia-Pacific Markets in Mumbai, said in an interview. “The infrastructure sector is the way to play the India story. We are optimistic on the road sector.”
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