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.