NMP impact: 10 stocks with high potential upside | Economic Times

The government has spent big on infrastructure over the past several years because the contribution from the private sector has been low. However, covid-triggered revenue fall is now threatening its fiscal position, raising questions about the government’s ability to maintain similar infrastructure spending in coming years. The recent announcement of the National Monetisation Pipeline (NMP), which plans to generate revenue of `6 lakh crore over the next four years, has perked up sentiments towards the infrastructure space. Will existing infrastructure players bid aggressively for these assets? They may not have a big appetite. “Going by the experience with infrastructure companies in the build, operate and transfer (BOT) models, they may not bid aggressively,” says Shailendra Kumar, CIO, Narnolia Financial Advisors. Infrastructure companies prefer building and not operating and the government recognises this fact. 85710852“Primary focus of infra companies is to build and many were forced to operate them because of earlier rules. Separating ownership and building is a superior model,” says Srinivas Rao Ravuri, CIO – Equities, PGIM India MF. The government will only lease out the operating rights in these assets and not their ownership.So who will be the potential bidders? “Compared to under-construction projects, risk is much lower for operational assets and therefore, foreign investors like sovereign funds, PE players, etc will be more comfortable,” says Ravuri. There may be good participation from domestic investors, who are comfortable with steady returns of 8-9%. 85710859Road assets comprise around 27% of this monetisation pipeline and a major portion of the proceeds are expected to be used for further road development. “Transport minister talking about a target of completing 100 km highway per day is significant and NMP is a right step towards that,” says Sachin Relekar, Senior Fund Manager, IDFC MF. That means road construction companies will benefit from this move. With monetisation of another 25% coming from railway assets, companies catering to railways will also benefit. “The government has also identified vacant tracts of land and housing assets in prime areas of Delhi for monetisation. This will give developers an opportunity to develop residential and commercial complexes under the PPP model in central locations,” says Ramesh Nair, CEO, India & MD, Market Development, Asia at Colliers.Power transmission (around 14%) and gas pipelines (around 8%) are the other two major segments in the monetisation pipeline. In addition to improving the power transmission system, the monetisation and its effective use by private sector players will help power generation companies also. India’s natural gas consumption is expected to go up three fold in the next 10 years and therefore, increased deployment in gas pipelines is a basic necessity. Monetisation of existing assets and redeployment of its proceeds will be a right step towards that. Increased penetration of national gas pipelines will also help city gas distribution companies. Banking sector will benefit indirectly. “Since most of these right purchases will be with a debt-equity ratio of 80:20, this will create incremental demand for bank loans,” says Kumar.Extra screening of companiesOptimism towards a sector or theme doesn’t mean that all stocks in that sector are good investments. “Opportunity is not an issue in the infra space now. However, investors should select the correct companies and give them time. Concentrate on companies with strong balance sheets,” says Relekar. After struggling with huge debt in the past, balance sheets of most road construction companies are in good shape now, thanks to the hybrid annuity model adopted by NHAI in recent years. Next step is to identify what makes companies niche and make sure they are reporting strong growth from their core activities. Though companies can report additional revenue by getting into newer areas, their profitability usually will be lower from these new segments. This diversification may also result in dilution of niche and may also bring down their execution track record in coming years. Make sure that this positive news is not yet fully discounted by the market and there is some meat left for new investors. If you are not interested in buying stocks directly, you can use any of the infra funds available.Graphics by Sadhana Saxena/ET Prime