Infrastructure Companies Debt and Stock Valuation



Since past 5 years, every time there was a big fall in infrastructure related stocks, investors felt that was the bottom and could not fall further only to be disappointing as the stock of those companies kept falling relentlessly. Majority of the boom time infra stocks are now virtually penny stocks, down more than 95% from it's peak and around 90% from 2010 highs.

Take for instance GMR infrastructure which was ruling at Rs 70 in Jan 2010 is now trading at Rs.12 as on 7th Aug 2013. Lanco Infratech has fallen 93% to Rs.5 from the levels of Rs.75 it was at in August 2010. GVK power fell from 52 levels in Jan 2010 to Rs.6 again a fall of more than 88%. HCC touched a high of 81 on 18th Jan 2010 and has fallen to Rs 10 as on 7th Aug 2013, a fall of around 88% in 3.5 years. HCC peaked at Rs140 in Jan 2008. Nagarjuna Constructions is down more than 90% since June 2010. The stock touched a high of Rs.192 in June 2010 but has now come down to Rs.19.

The central problem of such big fall is erosion of equity value due to tremendous increase in debt in balance sheets of these companies. The debts on some of these companies are so high that they are not able to even pay their interest on time and are resorting for CDR. Take for instance HCC, it generated an EBIDTA of Rs484 crores while the interest payment for FY-13 was Rs900 crores. Lanco Infratech had an interest payment obligation of Rs746 crores while it generated only Rs.819 crores. Naturally there is nothing left for shareholder after interest payment and providing adequate depreciation of large physial assets they have acquired. 

So is there any value left is infrastructure stock? Is there any infra stock where investors can do bottom fishing? The answer lies in the follwoing fact sheet and investor's investment horizon. Some infra stocks are complete avoid while some has value but will take time to recover.

One should not look at the quantum of fall in the stock price from it's peak as a valuation parameter as a stock can still be very expensive even after 90% fall. For example HCC is down 88% since 2010 but is still very expensive at 22 times EV to EBIDTA and virtually standing at the gate of bankruptcy as it's not able to generate sufficient cash to even payout it's interest obligation. Another example is GVK power and Infr which is also down around 90% since 2010 but is still very expensive at 24 time EV to EBIDTA and unsustainably high Debt to Equity ratio of more than 7 times.

But not all infra stock are in mess as there are some companies which are less levered and generate sufficient cash to stay afloat. Nagarjuna Construction for instance is lot less levered when compared with GVK or GMR and trading at reasonable EV to EBIDTA valuation of around 5 times. With Debt to Equity ratio less than 2 the stock could generate significant return in next 3 years time frame. At Rs.19 the stock has a market value of around Rs.485 crores. Punj Lloyd is another stock which looks relatively reasonably valued at 6.7 times EV to EBIDTA. 


FY13 ( Rs Crore)
Based on 6th Aug  closing price
Company Name
Total Debt
Interest Cost
Market Value
EBIDTA
EV/ EBIDTA
GMR Infra.
36489.78
2099
4640
2477
16.5
Lanco Infratech
31376.85
2421.44
1300
2730
12
GVK Power Infra.
18564.03
746.09
990
819
24
Hind.Construct.
9968.78
900.28
636
484
22
Punj Lloyd
6722.19
780.76
950
1150
6.7
NCC
3638.56
595.09
485
822
5.1
InvestorZclub

Any infra stock you look at for bottom fishing should have manageable debt to equity ratio and sufficient EBIDTA to cover the interest payment. Once the cycle starts turning in favor of infra companies the least levered companies should provide best returns going forward.



2 comments:

Ravikiran said...

What are your thoughts on DLF?

Amit Agarwal said...

Real estate sector in India is in terrible state. I have got sizeable investment in both residential and commercial properties in Kolkata and the buyers have completely vanished from the market. I know people who have invested more than 50 crores across residential and commercial properties and have not seen any selling in past couple of months and sitting at huge losses in time value as they are leveraged upto the neck.

I published an analysis on this at Indiapropertyboom you can read it here Realtors Defaulting Price Crash Imminent

Real estate sector is hoarded by investors and humongous amount of money is invested in the sector without the underlying fundamentals. DLF is overvalued even at 100 bucks and I won't touch it simply bcoz it has not the best of Corporate Governance and above that the sector is in mess. DLF also has huge amount of debt which it will find difficult to service on the back of falling sales.

Investors are now feeling sunk and offering as high as 30% discount to prevailing rates in complexes in Kolkata. Things are not good and I would advise everyone to stay away from real estate stocks in India.

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