“Honourable Mention” in Institutional Investor 2009RHH Research is also available on Bloomberg FTIS <GO> and Thomson First Call
Company CMP Target Rating
Ahluwalia Cont 169 190 BuyHCC 130 141 HoldIRB Infra* 209 224 BuyIVRCL 388 434 Buy JP Associates 239 237 HoldL&T 1,665 1,781 BuyNCC 153 166 HoldPatel Engg. 484 532 BuyPunj Lloyd* 262 306 BuySimplex Infra 510 577 BuyVoltas* 145 160 Hold
Profitability and return ratios
FY11E P/E (x) ROE (%)CompanyFY09-11PATCAGR (%)P/E
Sensex 13.0 16.1 16.1 17.3 18.2L&TStandalone 22.1 24.1 21.3 23.8 24.6Consolidated 22.8 21.5Ahluwalia Cont 38.8 9.6 9.6 37.2 36.2HCC 37.8 29.0 11.7 8.4 9.0IVRCL 27.3 17.2 14.0 13.8 15.0NCC 25.2 16.2 12.6 10.0 10.6Patel Engg. 23.7 17.9 12.2 12.3 13.8Punj Lloyd* 60.4 14.7 13.5 16.4 15.8Simplex Infra 28.5 12.4 12.4 16.3 18.0
* Consolidated #Excluding subsidiaries
Company CMP 1mth 3mth 6mthYTD
Sensex 17,135 10.2 17.0 73.077.6Cap Goods Index 13,731 6.1 6.4 112.498.7Ahluwalia Cont 169 13.0 94.4 406.6478.6HCC 130 22.9 25.1 223.4156.2IRB Infra* 209 (0.8) 28.1 138.261.5IVRCL 388 7.5 10.3 202.2169.9 JP Associates 239 7.8 15.1 180.3188.6L&T 1,665 7.4 5.8 147.6115.2NCC 153 13.4 11.1 143.3112.5Patel Engg* 484 10.512.9 244.3177.0Punj Lloyd* 262 1.6 22.6 184.5 78.1Simplex Infra 510 18.6 30.7 213.0195.6Voltas 145 (4.0) 17.7 192.0140.0
The time is right!
Run-up in valuations but still room for further upside:
Over the last six months,our universe of infrastructure and construction stocks has run up by a massive200% as against returns of 73% from the Sensex and 112% from the CapitalGoods Index. The sharp rally has been spurred by hopes that the recentlyelected, pro-reform government will boost spending on infrastructure, eliminatepolicy bottlenecks, and simplify procedures for project approvals. The surge instock prices is also a function of a re-rating in the broader market multiple, led bythe restoration of liquidity flows.
Last year, the construction & infrastructure sector suffered a major blow as India’seconomic growth slowed from 9% in 2007–08 to below 7% and the global creditcrunch starved infrastructure firms of funds. Now, w
ith healthy liquidity conditions,strong project execution, softening commodity prices, lower interest rates, and ahealthy political climate, we expect upgrades to consensus earnings estimates inH2FY10, leading to a further re-rating of the sector. High-growth mid capconstruction stocks look set to take the lead.
Government spends to invigorate sector:
Infrastructure spending of ~US$ 500bnin the 11
Five Year Plan and additional spending through government stimuluspackages provide strong revenue visibility for infrastructure players over the next4–5 years. At the same time, a rebound in economic growth and corporate capexalong with improved availability of funds augur well for the sector. Public sectorinvestments will be crucial going forward, with roads, irrigation, power andurban infrastructure likely to attract a bulk of the development funds.
Mid caps at attractive valuations:
Mid cap companies with strong revenuevisibility are currently trading at a discount of ~40% to L&T and at par to theSensex. Our mid cap construction universe traded at 18–20x one-year forwardearnings during FY04-FY09, which was a period of buoyant growth. The toplineof the RHH construction universe increased at ~34% CAGR and bottomline at~36% over this period.Although we expect lower revenue growth at ~20% CAGR over the next twoyears on account of the higher base, we anticipate a healthy bottomline ramp-upof ~26% led by rationalisation of interest costs. With strong earnings growth, wefirmly believe that valuations of our mid cap construction universe remainattractive at a P/E of 15.9x FY11E earnings and 12.7x excluding subsidiaries.
Long-term growth drivers:
While we expect stock performance to be volatile inthe short term, we see opportunities for above-average returns in companies thathave a strong track record, a sturdy financial backbone, and robust risk-management systems with the ability to scale up. As mentioned, softeningcommodity prices and lower interest costs offer potential for earnings upgrades.We remain positive on
in the large cap space,
in the mid cap space, and
in the developer segment.