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MUMBAI: Shares of engineering and infrastructure companies have outperformed their benchmarks in the past one week as investors lapped up these battered stocks on hopes interest rate cuts by the Reserve Bank of India could improve sentiment in the sector.

However, fund managers believe recent gains in these shares may be overdone because the absence of adequate order flows may weigh on revenues and high debt will squeeze profits.

Mid-cap infrastructure companies like Lanco Infratech. Simplex Projects. IVRCL, Nagarjuna Construction, Hindustan Construction and Alstom Projects have risen 20-40% over the past one week.

Their larger peers, L&T, BHEL and ABB, have surged 7-20%. The 30-share Sensex gained over 1.8% during the same period.

We’ve begun seeing some amount of risk trades in the infrastructure segment. This is one reason why infrastructure stocks, which also include some construction and real estate companies, have gained over the past one week, said PVK Mohan, equities head, Principal Mutual Fund. For now, I do not see any improvement in sector fundamentals, he said.

Higher interest rates and slowing economic activity have affected infrastructure and construction companies. The sector has been a significant underperformer in the market for over 20 months now, brokers said. While mid- and small-cap stocks in the sector are still trading close to their historical low prices, large-cap companies are trading at 30-50% discount to prices a year ago.

The recent rally in infrastructure stocks is quite premature. Infrastructure stocks have been beaten down significantly over the past several months. We’re just seeing a minor bounce back now, said Prateek Agarwal, chief investment officer of ASK Investment Managers.

According to Agarwal, lower infrastructure groups like construction and real estate are highly leveraged and it is way too early to invest in these stocks. Rate cut is not likely to happen immediately. Even if rate cuts were to happen, their impact will be seen only after 4-5 months. We’ll continue to see core companies putting out bad numbers for some more quarters, Agarwal said.

Echoing him, Krishnakant Thakur, power & infrastructure analyst at Espirito Santo Securities, said the only positive development for the infrastructure sector is the plateauing of interest rates. Overall sector fundamentals have not changed, he said.

During the bull run, investors had rushed to invest in companies that built roads, utilities and airports, which were deficient in an economy that was growing at more than 8%. But the pace of building slowed with the government struggling to address issues such as land acquisition, environment clearance and supply-side inflation.

Rate cut alone will not go all the way to solve problems faced by the infrastructure sector. The government will have to restart reforms and development to get the capex cycle moving once again, said Mohan of Principal Mutual Fund.

The consensus is that investors can buy companies which have roads and port projects in their portfolios.