Sector picks for 2011 - (2) : Infrastructure

Infrastructure has been one of the worst performing sectors of the 2010 equity markets. Over two-thirds of our 40 infrastructure stock universe delivered negative returns in 2010.

With a median return of -15 per cent (up to December 27) for a universe of about 40 stocks, the sector was way off the Sensex performance of 15 per cent. Slower execution of projects in some segments and resultant drag on revenue growth and tepid order inflows have all resulted in the markets viewing stocks from the sector unfavourably.

Positive Developments:

New regulations in the road space, more funding channels besides the compulsion to achieve at least a respectable part of the targeted twelfth plan which ends in FY-12 are macro factors that may turn the tide in favour of infrastructure companies in certain business segments in 2011.

Infrastructure developers who own a portfolio of highways, contractors in the road and water management space as well as technology providers for water may be the key beneficiaries of the turnaround expected in the sector in 2011.

Portfolio owners

Road developers, such as IRB infrastructure Developers, IL&FS Transportation Network, Jaypee Infratech or Sadbhav Engineers who own portfolio of roads on a build-own-operate-transfer basis could emerge as good bets in the road space.

With pick-up in economic activity, toll revenues of players such as IRB have already seen a 22 per cent increase, largely driven by higher traffic.

On the macro front, the government has stated its intent to award the remaining 5000-5500 km planned this year by the end of this fiscal. This could mean a higher level of order inflow in the next few months than what was seen in the last eight months. Contractors such as C&C Constructions or Unity Infraprojects with presence in road work too may benefit from the sudden surge in order inflows.


Activity in the irrigation segment, dominated by spending in States such as Andhra Pradesh have seen diffused focus as a result of political turmoil. Besides lull in order inflows, execution of existing projects too suffered as a result of slower payments to contractors.

However, another large state-expenditure area - water supply and sanitation- though, has seen brisk business in areas of sewerage treatment, water recycling and desalination. Companies such as Pratibha Industries, Ramky Infrastructure which execute significant projects in the water and waste management space besides water-related technology providers such as Hindustan Dorr Oliver and VA Tech Wabag can also be expected to ride the infrastructure wave.