India needs new roads, ports, airports, railway lines and huge amounts of power. Apart from steel and cement, there are several ancillary plays as well. For instance, warehouse network will be needed along the roads and near ports. As more small towns get connected to big cities through roads, vehicle sales will benefit.
Strategy: Not good for paying school fees; great for college education kitty.
Blue Star:
Two decades to reach Rs. 1,000 crore in sales; two years to reach Rs. 2,000 crore in 2008. Non-core businesses are gone and 90 percent of revenues come from refrigeration and cooling products. It’s almost debt-free with an ROCE of over 50 percent. Growing demand for cold storage, outsourcing outfits and other commercial offices in Tier II cities put the estimated non-residential demand for air conditioning at Rs. 38,000 crore.
BHEL:
For 2009-10, the company is increasing its capacity from 10 GW to 15 GW. Capacity additions are ahead of schedule. The slowdown in the global economy has brought down input costs significantly. The company has also taken control of its salary costs that were eroding its profit margins. BHEL will be among the top beneficiaries as India begins to add 20,000 MW of generation capacity each year for the next five years.
Power Finance Corporation:
At about 25 percent, the company’s net profit margin is close to what the best software companies earn at half their price-to-earnings ratio. This public sector company also enjoys the preferred lender status for all the mega power projects in the country. Its employee expenses are just 1 percent of sales.
Mahindra & Mahindra:
Rural India is earning well because of infrastructure boom. M&M’s SUVs are selling briskly and its market share in the SUV space has gone from 51 percent to 57 percent in the last two years. A week after Xylo was launched, M&M received 9,000 bookings, or one-fifth of its annual SUV sales. The stock may be fully priced now but the upshot comes from prosperity in the hinterland that better infrastructure will bring.
Allcargo Global Logistics:
This stock was one of the earliest to recover after it fell dramatically in October. It has already recovered all the lost ground as the company managed to keep its net profits margin above 15 percent. The stock is available at a P/E of 17 on trailing earnings, just as expensive as the broad market. Allcargo, a complete logistics provider, is positioned well to exploit the projected 17 percent in port traffic and the increasing trend of outsourcing of logistics by manufacturing companies.
Risk: Long payback periods are par for the course in infrastructure. As a result, earnings in the near term could be depressed, often in proportion to the borrowed funds. If costs of funds go up, returns could diminish. In some cases, regulatory glitches can also slow down the process as is the case with mega power plants coming up in Uttar Pradesh.
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