Earlier this month Indian Railways set in motion its plan to privatise the operations of 109 routes which are currently operated by the Government agency. The bid attached to the requests for qualification from private companies for running 151 trains in 109 routes with each train having 16 coaches.
This is an important step not only for the future of the public sector in India but as an investor this will give you an perspective as far as investing in large cap stocks with the possibility of future is concerned.
Our list will be based on the first bidding process which took place in December 2019 in which 20 companies involved in the domain of infrastructure and transportation participated. So, without further delays lets dissect the two most probable and value driven companies and see if there’s value in investing.
Adani Ports
Being one of the largest logistics company in India with an existent private railway line spanning 300 kms connecting ports and business hubs for cargo movement, Adani ports is well suited and has the infrastructure in place to facilitate such a large scale operation.
The company also has experience with the government operations as evidenced by 81 FTE on contract primarily in the realm of metro operations. Adani Ports has an excellent financial stability which makes it the ideal for capital investment.
As per Adani Port’s 2020’s annual report, the company has had stable profit since 2015 and enjoyed a 14% growth from ₹ 10,925 Crores in 2019 to ₹ 11,873 Crores in 2020. While on the subject of Adani Port’s finances, Basic Earnings Per Share also went up by 10% since last year to ₹ 18.35 which is a solid given the Debt-to-Equity ratio of 1:1 backed up by Net Fixed Assets of ₹ 30,704 Crores.
With all that considered, Adani port is a likely candidate among others to be if not in its entirety but at least in part an operator in the lucrative privatisation project.
Larsen & Tourbo
L&T has been a major player in the rail and metro projects as evidenced by its government contracts executed last year of the Dedicated Freight Corridor and significant involvement in the Mumbai-Ahmedabad high speed rail project, rapid electrification of railway lines and track improvement/augmentation.
Apart from this, L&T has been heavily involved in the Metro Rail business with 600 kms of already functioning metro operations and another 600 km under construction and 1400 km under planning stage. L&T estimates net income from Metro based projects to hit ₹ 400,000 crores in near future.
As far as L&T financials are concerned, the group reported a profit of ₹ 86,988 crores in terms of gross revenue which is a 16.6% increase from last year’s figures of ₹ 74,612 crores. L&T also enjoys a growth to equity ratio of 1.8:1 and pays a dividend ₹ 18 per share which is a step up from ₹ 16 of last year while having a value of ₹ 63.51 as far as earnings per equity share is concerned.
All things considered, L&T certainly has the financial stimulus and the favour of government to win such a project. Taking into account their prior experience with exactly this kind of work, it makes sense to invest in them even if the bid ends up not going in their favour.
With all that being said, the way privatisation will affect the masses is not a question that we have to concern ourselves with at least in the long run. It is true that the decision is reflective of the government’s effort to cut its losses given the abhorrent financial discredit suffered on account of the pandemic. As far as investment opportunities are concerned, there is value for investing these companies as is well substantiated by their large market cap and stable financials.