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<p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">Infrastructure has been among the worst affected industries in the current economic slowdown. In the last couple of years, a high fiscal deficit for the central government and generally tight liquidity conditions have resulted in cutbacks in both government and private sector spending. The consequent delays in project execution and lack of fresh orders saw most infrastructure firms go into the red.</span></span></span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">The poor financial state of the government is well portrayed in the lack of orders for infrastructure such as roads, bridges and ports. For instance, in fiscal 2013, the National Highways Authority of India awarded 1,116 Km of roads compared with the targeted 9,300 Km. Worse, in the current year till date, only 551 Km have been awarded.</span></span></span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">Thus, at the end of the September quarter, fortunes of infrastructure companies hit the abyss. Rising interest costs and falling profit margins over eight quarters have trickled down to a precarious interest cover of less than one for many firms. This means they do not generate enough cash flows to cover their interest payments.</span></span></span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">Note that relatively high interest rates are also hurting firms. Interest costs rose 70% in the two years to September for the top nine infrastructure firms in the country, a Mint study showed. Companies such as IVRCL Ltd. and NCC Ltd. continue to disappoint over several quarters. Only a few such as IRB Infrastructure Developers Ltd and Sadbhav Engineering Ltd. along with the diversified behemoth, Larsen and Toubro Ltd., have somewhat survived this period.</span></span></span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">Obviously, the first sign of relief will come from lower interest rates, which will also ease working capital pressures. But with inflationary expectations still relatively high, a turning of the monetary policy cycle is some time away.&nbsp;</span></span></span><span style="color:rgb(105, 105, 105); font-family:arial; font-size:11px; line-height:1.6em">Much, of course, depends on the outcome of elections in the middle of the year. Faster policy decisions along with quick execution by the new government to nudge the economy into recovery will help these firms and their order books.</span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">For now, many companies are going through the corporate debt restructuring programme. Bleak prospects have resulted in market capitalization of the sector dropping by more than half.&nbsp;</span></span></span><span style="color:rgb(105, 105, 105); font-family:arial; font-size:11px; line-height:1.6em">To sum up, a turnaround in sentiment on the Street towards this sector is not visible in the near term. As Kotak Institutional Equities points out, 2014 could be a year of transition (on the whole) where the quality of governance and willingness of the new regime to reinvent India will drive investor sentiment.</span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">Source-On Request</span></span></span></p>