Best Infrastructure Stocks in India: Should you invest?
What Are Infrastructure Stocks?
Infrastructure is a term that refers to the common physical systems of a country, business, or region. For example, communication networks, transportation systems, and utilities like gas, electricity, water, etc. come under infrastructure. Note that these systems are very crucial for the growth, development, and prosperity of a country. Another thing about these systems is, that they tend to be a high-cost investment and are also capital intensive. Moreover, the companies functioning in this sector offer their stocks known as infrastructure stocks. Some good examples of infrastructure stocks in India include Bharti Airtel (Telecommunication Services), Ashok Leyland (Trucks and Buses), Tata Motors (Four Wheelers), etc.
Future of Infrastructure Sector in India
India has a growing ambition to become a major economical superpower. This ambition has to be driven by various sectors of which, the infrastructure sector is a major growth engine. With its immense power to cause a domino effect in the economy, it's a no-brainer that the government of India is looking to amp up its capital expenditure budget after budget. The infrastructure sector includes power, bridges, dams, roads, and urban infrastructure development. India is said to become the world's third-largest construction market by 2022. Various schemes launched by the government promise huge opportunities for the companies involved in infrastructure-related activities. Under the National Infrastructure Pipeline, Housing For All by 2022, 100-PM GatiShakti Cargo Terminals, and Smart Cities Project are some of the avenues that provide the impetus for the growth of infrastructure in India.
Types of Infrastructure Systems
The infrastructure systems can be divided into three broad categories given as follows:
Soft Infrastructure — This type of infrastructure is less capital intensive and ensures smooth and obstacle-free functioning of the country. This includes financial institutions, law enforcement, governmental systems, education systems, etc.
Hard Infrastructure — This type of infrastructure system includes physical systems that allow businesses to run an efficient industrialized and modern nation. Some examples are highways, roadways, etc. These systems need capital and assets for functions and operations.
Critical Infrastructure — Finally, there is a critical infrastructure segment that is very crucial for the basic functioning of a country. This includes companies and businesses operating in energy, telecommunication, electricity, agriculture, public health, and so on.
How to Select the Best Infra Stocks to Invest in 2022?
The best way to evaluate infrastructure stocks is to thoroughly examine their quantitative and qualitative dimensions. This involves mainly three points:
- Physical assets owned by the company
- Company itself
- Relationship between stock valuation and quality
When choosing the best infrastructure stock, an investor should look for capital appreciation as well as net income. Further, when looking at different physical assets, you should consider the factors such as growth prospects, the market position of the firm, and the contract or regulatory framework. And because the contract framework helps in computing the revenues, it should be analyzed carefully.
Management in infra stocks: As an investor, you should also closely observe the capital structure, strategic direction, corporate governance issues, and operational quality of the entire management of the company. Once you analyze the company's quality and its asset level, you should focus on the overall performance and quality of the business.
Order Execution by infra companies: It is a key factor that determines the quality of business and the better the quality, the higher will be the evaluation. However, keep in mind that a fat order book doesn't mean anything if the company is not able to run the projects in a fast and efficient way. Most projects now come with deadlines and incur penalties in case of late delivery.
Financial Stability in infrastructure stocks: Next, the consolidated statements of a company including its profit and loss data, balance sheet, cash flow statement, etc. also need to be analysed in order to determine the quality and performance of the infrastructure company. The fundamental ratios to analyze include debt-equity ratio, book-to-sales ratio, price-to-book ratio, asset management ratio, and a few others.
Debt to Equity ratio in infrastructure shares: As we have discussed above, the infrastructure companies are capital intensive, you will find their debt to be slightly high on their balance sheets. Here, you need to ascertain whether the company has sufficient returns and profits with respect to the debt it raised. Besides, you should also take into account the interest cover ratio, which can be easily calculated by the following formula:
Interest Cover Ratio = Operating Cash Flow ÷ Borrowing Cost Paid
If you don't already know, most of these ratios are linked with each other and hence, shouldn't be treated individually. These ratios can provide you with the most crucial past, current, and future performance of an infrastructure company.
List of 10 Best Infrastructure Stocks in India 2022 based on M-Cap
(Price date as per June 27, 2022)
Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns
Reliance Industries: A major player in the infrastructure space in India is Reliance Industries. With the majority of its earnings coming from the Oil-to-Chemicals and refineries business segments, Reliance is a key contributor to India's infrastructure strengthening. Apart from the above-mentioned business segments, Reliance Jio, being the market leader in the telecom space in India has a lot of steam left though the implementation of 5G infrastructure services.
Bharti Airtel: The infrastructure sector includes even the telecom sector players charged up to connect the billion Indians across the length and breadth of the country. Bharti Airtel, with its dominant position only second to rival Reliance Jio, has a lot to offer through its niche offerings. With huge investments and vital partnerships with the likes of Google, Bharti Airtel is a force to reckon with in the telecom infrastructure space in India.
Larsen and Toubro: With a wide presence across various infrastructure-related verticals, including Construction, Power, Minerals, and Metals, Heavy Engineering, Realty, Metro, and Digital Services; L&T has it all. Over the years, it has carved itself as one of the world's most trusted partners in the infrastructure sector of the country.
ONGC: The Oil and Natural Gas Corporation of India, currently, India's most profitable company is someone you can't ignore in your list of the best infrastructure stocks. It is India's largest crude oil and manufacturing company contributing close to 71% of the entire domestic requirements.
Ultratech Cement: From the house of Aditya Birla Group, Utlratech Cement is the largest manufacturer of grey cement and ready-to-mix concrete in the country. Valued at around USD 7.1 billion, Ultratech Cement is one of the founding members of the Global Cement and Concrete Association.
Power Grid: Again one of the Maharatnas, Power Grid is India's largest Electric Power Transmission Utility company. It provides services across various verticals including transmission networks, consultancy as well as telecom.
Adani Ports and SEZ: With a vision of being the largest contributor to the nation-building process, Adani Ports and Special Economic Zones is the country's largest commercial ports operator contributing close to one-fourth of the total cargo movement.
NTPC: Again, we meet another major player in the power vertical of the infrastructure sector. The National Thermal Power Corporation of India founded in 1975, has carved itself as one of the country's foremost power generators. Over time it has gained excellence across its value chain by achieving high capacity utilization and operational efficiency.
Indian Oil Corporation: From generating power, we dive into crude oil refining. The Indian Oil Corporation is among India's largest refining companies with close to 32% market share. Over the 100 years of its legacy, it has established itself as a key overseas player through strategic joint ventures and partnerships.
Grasim Industries: Another from the house of the Birlas, Grasim Industries is a pioneer in Viscos in Viscose Stable Fibre, a biodegradable fibre that vows to replace cotton. Apart from textiles, it has a considerable presence in the chemical sector as well.
Important things to remember:
1. Do Not Blindly Follow Hot Tips
No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly.
2. Eliminate Loser Stocks from Portfolio
There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses.
3. Don't Exceed Your Investment Budget Abruptly
While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares.
Infrastructure companies play a very important role in defining the growth and development of our country. This accounts for the increasing popularity of infrastructure stocks. By investing in the right infrastructure stocks, you can not only gain higher returns over the long term but also secure your financial future to a great extent. We hope this information on infrastructure investment helps you.
What is infrastructure investment?
Infrastructure investment includes investing in physical systems that are necessary for the smooth and hassle-free functioning of a country. These include systems like real estate, energy, water, electricity, telecommunication, financial services, roadways, etc.
Is infrastructure a safe investment?
The infrastructure sector is growing at a rapid rate in India. This indicates its importance and a promising future in the country. Provided that you're investing for a longer investment horizon, infrastructure stocks can be a relatively safe and low-risk option.
What asset class is infrastructure?
Infrastructure is considered a low-risk asset class with a longer investment horizon, as compared to other investment options.