Sunday, February 15, 2009

How to Select Stocks within Infrastructure Sector

During the later stages of the previous bull market, stocks from the real estate and infrastructure sectors were on the top of investor buy lists. Those who invested in these sectors are sitting on massive losses as most stocks have fallen much more than the Sensex.

Many inexperienced investors are tempted by the current low prices to try and lower their average holding cost per share. That would be akin to 'catching a falling knife'. Averaging down may be a smart move if you are 100% certain about the management quality and the business outlook of the company. Most real estate and infrastructure companies will not qualify on either count.

Unfortunately, despite the massive fall in prices of real estate and infrastructure shares, investor fascination has not completely waned. Last week, I received a couple of investor queries that brought this shockingly to the forefront.

One asked: Which one is a better buy - IVRCL Infra or GMR Infra? The other asked: Is Punj Lloyd a good buy at Rs 95?

I decided to do a little digging by visiting the Rediff site. Here is what I found (for three years ending Mar '06, Mar '07 & Mar '08):

IVRCL had negative cash flows from operations for all three years - going from -83 Cr to -377 Cr; decreasing Net Profit Margins (NPM) - 6%, 5.9%, 5.6%; EPS of Rs 15.80 (in '08).

GMR had negligible cash flow from operations in '06 and negative cash flows of -7 Cr and -57 Cr in '07 and '08; wildly fluctuating NPM - 58%, 8%, 60%! EPS of a miniscule Rs 0.34 (in '08).

Punj Lloyd had negative cash flows from operations for all three years - going from -84 Cr to -233 Cr; marginally increasing NPM - 2.5%, 2.7%, 4.9%; EPS of Rs 7.30 (in '08).

Now the three years in consideration also happened to be the three biggest boom years for the infrastructure sector in India. And our three 'gems' failed to earn a single Rupee in cash! Wonder what they will do during this prolonged Bear Market? Keep wondering - just don't touch these stocks.

Since I am a firm proponent of buying only the best and leading stocks in any sector, I took a quick look at the figures of L&T. And this is what I found.

L&T had positive cash flows from operations for all three years - 1369 Cr, 2130 Cr and 1945 Cr; increasing NPM - 6.7%, 7.7%, 8.5%; EPS of Rs 74 (in '08). Based on these figures, I am inclined towards discounting GMR's ridiculously high NPMs in '06 and '08. (May be these were typos on the Rediff site.)

Since all four companies have shares with face value of Rs 2, the EPS figures are comparable. On all counts, L&T is the clear choice - and by my reckoning, the only stock to be considered in engineering and construction within the infrastructure sector.


income.portfolio said...

Having worked in three different continents, I appreciate LnT much more now, then when I was an LnTite. It is one company that is professionally managed. Can we say the same for any company in India? Pick any one, and one will find heavily influenced by founder, owner, or patriarch. Perhaps, LnT's past lineage helps it maintain the professional culture. Great sensible Pick!

Subhankar said...

Thanks. I have been fortunate to invest in companies that have provided great long term returns. TISCO, Hindalco, M&M, ITC, HUL, Cummins are all professionally managed - though the last two are foreign owned.