Almost a week ago, the Modi Government announced a mega infra push of INR 102 trillion to reinvigorate growth in the so called “world’s fastest growing economy”, which apparently is reeling under a severe slowdown. We all will agree that the quantum of money is humongous. If implemented smoothly it will have a positive impact on the economy. Therefore, many investors (especially retail) are now thinking “Let’s invest in the Nifty50 Index. If the economy is to prosper, Indices will also hit new highs”. But, before putting your money, you should definitely look at some interesting stuff (below), which might prompt you to think differently.
Will such a bold policy move bolster the earnings of the Nifty50 and support its stretched valuations? Can the Nifty50 touch new peaks solely based on this mega infra push? Read below to find out.
The weight of infrastructure companies in the Nifty50 is too low (5.8 per cent) to trigger a meaningful rally. Hence, mere infra companies can’t really enhance the earnings of the index. So, what is actually needed by Nifty50 to get a booster shot from this infra push. Our answer lies in the Build, Operate and Transfer (BOT) model of the infrastructure segment. The BOT model involves private players to acquire 100 per cent funding by themselves either by raising debt or equity. An increase in the demand for such projects can lead to an improvement in the credit growth in the economy, as lending from banks will climb. Banks & Financial Institutions have highest weightage in the Nifty50, so a combination of both can lead to a meaningful rally.
But there is a road blocker.
Share of BOT project awards at the National Highway Authority of India (NHAI) has come down drastically to 14 per cent between FY14 and FY19 from 88 per cent between FY11 and FY14. This fall clearly depicts the economic slowdown which has weakened the ability of companies to honor interest obligations, and has made banks wary of lending to such projects. Hence, it is highly unlikely that infrastructure companies will trigger a meaningful rally in the Nifty50.
So, if not Nifty50, then where can we see the major impact of this policy move happening?
That’s likely to happen in the companies beyond Nifty50. The weights of infrastructure companies in indices like Next Nifty50, Nifty100 and Nifty500 are in the range of 7-13 per cent. Henceforth, there is a good chance of earnings enhancement in these indices.
We perceive that the recent policy can help in making the rally more broad based involving the Midcaps and the Smallcaps, which have remained out of favor since the start of 2018. And for the Nifty50, it has to look for some other earnings trigger to steer itself to new highs!!
Source: ET, Moneyexcel, TOI, and NSE.