Construction & infra firms among biggest wealth destroyers in past 20 years

They first reported a surge in stock prices and then all went downhill

Companies in the construction and infrastructure sector have been among the biggest underperformers and wealth destroyers in the stock market in the past 20 years. The sector has also seen a wave of corporate failures and bankruptcies, making it tough for retail or non-promoter shareholders to make money on their investments.

The numbers suggest that companies in the infrastructure sector go through a typical boom-and-bust cycle. First, there is a sharp rally in the share price as companies report rapid growth in revenues and profits, but then earnings growth loses steam, triggering a big sell-off in these stocks and a further decline in share prices that lasts for years.

For the poor showing by these companies, analysts blame high debt, poor return on capital and equity, and the inability of these firms to sustain growth and earnings when financial and macroeconomic conditions turn adverse.

Business Standard has analysed 10 infrastructure stocks that have gone through this boom and bust cycle in the past 20 years; their current share price is a fraction of their all-time highs.

For example, the share price of Jaiprakash Associates jumped 20 times between 2004 and 2007, and the stock was included in the benchmark Nifty50 index. Its fall was equally swift. 

Within 12 months of hitting an all-time high in December 2007, the stock price declined by 85 per cent in 2008; there was a recovery in 2009 but the stock never reclaimed its 2007 high and once again declined in 2010, never to make any significant recovery again. 

The stock is currently trading at Rs 8.96 per share, down nearly 95 per cent its all-time high share price of Rs 284 reached in December 2007.

Similarly, Anil Ambani-owned Reliance Infrastructure rallied 300 per cent between January 2004 and December 2007 but then lost 99 per cent of its value over the next decade. The stock is currently trading at Rs 119 a share, still down 95 per cent from its all-time high in December 2007.

Punj Lloyd, too, witnessed a similar crest and trough. The stock rallied 150 per cent in 2007 but lost 99 per cent of its value over the next decade. Its shares last traded at Rs 2.23 apiece, down 99.6 per cent from its all-time high share price of Rs 544.7 in December 2007. The company was suspended from trading in October last year by bourses for its failure of meeting listing requirements.

Similarly, GMR Airport Infrastructure is currently trading at Rs 37 per share, still down 70 per cent from its all-time high. There has been a similar level of wealth destruction by other companies in the sector, such as Hindustan Construction, Lanco Infratech, Suzlon Energy, GVK Power & Infrastructure, and Reliance Power.

Highway operator IRB Infrastructure Developer has been an exception and has witnessed a sharp rally in the past three years. 

Despite this, its stock price has remained range-bound in the past 15 years.