Has infrastructure sector turned attractive?

Once touted as the sunrise sector of India, the infrastructure sector has been getting everything wrong for quite some time. The second quarter ended September, 2011 (2QFY12) saw the infrastructure players posting dismal numbers. Most companies reported significant year-on-year decline in profit after tax (PAT). The poor show was attributable to a steep incline in interest costs, which escalated in the range of 200 to 500 basis points (2-5%). One reason for this was the slew of hikes in key lending rates by the Reserve Bank of India (RBI) to battle the high inflation. The other reason was the high debt burden coupled with a significant increase in working capital requirement. But this is just one part of the story. The other concerns plaguing the sector include regulatory hurdles, land acquisition problems, delays in project execution and such other structural bottlenecks.

So there is no denying that there are ample reasons for the negativity surrounding the infrastructure sector. But we believe that in times of panic, investors have a tendency to be shortsighted. The reactions at such times are often extreme and disproportionate to what the events call for. You could say that such is the current situation of the infrastructure companies, as many of them trading quite below their book value. Value investors may want to scoop up some fundamentally stronger ones amongst them for the long term.