Construction companies L&T, Simplex get thumbs up on Modi’s spending plan

Prime Minister Narendra Modi’s plan to spend a record $60 billion on infrastructure this fiscal year has started trickling into company earnings, giving analysts a reason to turn optimistic about Indian construction stocks. Larsen & Toubro Ltd., the nation’s largest engineering firm, has rallied 27 percent this year, beating the benchmark gauge which has risen 19 percent. Gayatri Projects Ltd. and KNR Constructions Ltd., which build roads, and Simplex Infrastructures Ltd. have also surged. The outperformance may continue as the nation’s central bank rate cut of 200 basis points since December 2014 is helping companies better manage leverage, while new orders are expected to pick up pace in second half, brokerages including Macquarie Group Ltd. said. And now that the June-quarter earnings season has concluded, bullish notes are trickling in.

Macquarie Capital Securities India analyzed results of 12 companies from the sector with combined revenues near that of Larsen & Toubro’s engineering and construction division. Their total revenue rose 12 percent after three quarters of no growth. Goldman Sachs India said first-quarter earnings suggest that there are “green shoots” for cement consumption driven by low-cost housing and infrastructure. Larsen & Toubro, viewed as a bellwether for domestic economy, reported a 16 percent jump in revenue from its infrastructure segment, the most in five quarters. The growth was driven mainly by the local market, the company said. Earnings “read across of the mid-cap EPC space supports our thesis of domestic capex revival,” Macquarie’s analyst Inderjeet Singh Bhatia wrote in an Aug. 22 note. He has the equivalent of a buy rating on Larsen and NCC Ltd., a construction company.

Larsen & Toubro Limited