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India’s Darling Infrastructure Stocks which could do no wrong turn Lepers Overnight (INXX)

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India’s Infrastructure Sector which was considered the ideal play on India’s fast growing GDP and its huge infrastructure requirements long commanded nosebleed valuations.While realty stocks which are closely related to the infra ones had long collapsed after the GFC in 2008 ,the infrastructure stocks had retained their preeminence in the stock market rally.However end 2010 and 2011 has seen a vicious change in their fortunes.Stocks like IVRCL,IRB,Punj Lloyd,L&T,Gammon etc have seen their stock prices nosedive.The stocks have corrected far more than the broader market which has itself fallen more than 15% inĀ  2011. The problems related to the infrastructure stocks are varied and they have converged for investors to totally lose confidence in this sector something akin to the realty sector.The list of the problems are

1) Regulatory Problems – India’s government has lost its reform momentum and got mired in a number of corruption scandals.This has cause a policy paralysis amongst the bureaucrats and decision makers with risk aversion the name of the game.The 2G Scam,ADAG Insider Trading,Mid Cap and Small Cap Scams have all contributed.

2) Project Delays – Indian projects have seen massive delays leading to huge cost overruns.This is due to slow approvals,land acquisition problems etc.Environment Ministry has also become quite active leading to more delays.

3) Inflation and Rising Interest Rates – The Bernanke Global Reflation has hit Emerging Markets Hard with rising costs of input commodities and rising wage costs.Inflation severely huts the infra players who typically make thin net profit margins.Being highly capital intensive,interest rate increases hurts them more than others as well

4) Corruption and Corporate Governance – India’s Realty Sector has long been a quagmire of corruption and Infra Stocks are closely related with a number of Infra Players also having major operations in Realty Development.

While these problems are a concern in the short term,the falling stock prices have created an attractive opportunity to enter the infra sector which is going to see $500 billion in investment in the next 5 years.For the first time after the GFC,valuations are coming to somewhat attractive levels to buy into quality companies such as L&T and others.For Indian investors Infra Bees and for US investors INXX are possible investment instruments to enter the Indian Infra Sector.


Abhishek Shah

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