The recently cleared Land Acquisition Bill is likely to further drag the earnings per share (EPS) of infrastructure majors as the higher cost of acquiring land could hit margins of these companies over a period of time, say analysts.
Brokerages feel that land costs could go up by 3-6 times in rural and urban areas. ?Because of the way the market value is calculated, it appears that the actual cost of land for acquisition in future will be easily 5-6 times the average market value in rural areas and 3-4 times the market value in urban areas. A rough benchmark for land cost as a percentage of the total project in large industrial (power/steel, etc) is about 5-10% of total project cost. If this cost was to go up 3-6 times, it could impact the project economics adversely,? said Citigroup in a research note on Friday.
According to Bloomberg data, the 12-month trailing average EPS for the infrastructure majors that constitute the CNX Infra index is R11.50, which is already the lowest among core sectors listed on the NSE. Analysts say companies with asset-heavy models will be the worst hit.
?The impact of the Bill may not be immediate on the financial parameters for most players in the infrastructure sector. The impact on companies that have a developer-centric role involving asset ownership will be comparatively higher than the companies operating on the engineering, procurement, construction (EPC) model,? said Sandeep Upadhyay, senior vice-president & head, infrastructure solutions group, Centrum Capital.
Market watchers add that while infrastructure firms may see some headwinds, real estate companies will not be directly impacted by the Bill. ?The Bill comes into play if more than 50 acres of land is being acquired in an urban area and more than 100 acres in rural areas. So, the clauses of the Bill would come in picture for a real estate player when a large township project is being undertaken. However, there can be some impact on property prices,? said Deepak Purswani, research analyst, ICICI Securities.
In the current calendar year, CNX Infra has shed 23.58%, while BSE Realty is down 42.73% in the same period. However, some experts feel that the Bill will be broadly positive in the long run ?Although the cost of buying land would go up, the Bill would quicken the process of buying. So, the developer?s capital would be locked in a project for a shorter time,? said Saurabh Mukherjea, CEO (institutional equities), Ambit Capital.
