Sector Review | Infrastructure

August 18, 2011 Shailesh Kanani

+91 22-39357800 Ext: 6829 shailesh.kanani@angelbroking.com

Result Review
And they all fall down
Top-line growth goes for a toss; worrying sign: Most of C&EPC players (ten companies chosen for this analysis) have witnessed slowest growth on top-line front in 1QFY2012 on yoy basis in recent few quarters. We have mentioned in our earlier notes (read 4QFY2011 review) that sector has done well on top-line front (during those times) but earnings are marred given high interest rates and inflationary pressures. But given the dismal top-line performance this time around we believe that problems on earnings front would accentuate further in times to come. Further, we are not expecting any softening on interest rates and commodity front in next three-six months which will put further pressure on earnings. We believe these are worrying signs given early monsoons this time, second quarter being seasonally the weakest quarter for C&EPC players and macro headwinds still surrounding the sector demonstrating that earnings growth for next couple of quarters of these C&EPC players would remain muted. Valuations are at abysmal levels, but we continue to remain selective: Stock prices of C&EPC companies have taken a beating on the bourses after posting poor quarterly performance, bringing the stocks to very attractive levels on the valuations screen. But considering the various headwinds faced by the sector and no respite on the same we believe that stocks would feel the heat for some more time. Further, lack of positive news flow is not helping the sectors performance. Notwithstanding this it should be noted that there is pertinent need of infrastructure in the country and the economy would get derailed from its high growth trajectory if these needs are not met, which is acknowledged by one and all. Hence, we believe that the long term growth story for the sector remains intact. However, we believe that stock specific approach would yield higher returns given the disparity among these companies and changing dynamics affecting them positively/negatively. Hence, in current uncertain times we remain positive on companies having 1) comfortable leverage position (L&T and Sadbhav); 2) strong order book position (L&T, IVRCL and Sadbhav); 3) undemanding valuations (IVRCL) 4) superior return ratios (L&T and Sadbhav); and 5) less dependence on capital markets for raising equity for funding projects (L&T and Sadbhav). Hence, we maintain L&T, IVRCL and Sadbhav as our top picks in the C&EPC space and recommend IRB in the development space after its recent fall bringing the stock to attractive levels.

Nitin Arora
+91 22-39357800 Ext: 6842 nitin.arora@angelbroking.com

Quarterly numbers Angel vs. Consensus

Cos. Top line (` cr) Actual Angel Est. Cons. CCCL HCC IRB Infra IVRCL JAL NCC Sadbhav Simplex In. MPL L&T 507 1,058 801 1,124 3,178 1,142 613 1,261 329 9,483 559 1,110 767 1,217 3,588 1,170 655 1,251 481 9,938 536 1,103 669 1,238 3,377 1,193 572 1,292 NA 9,505 Variation (%) EBITDA (` cr) Variation (%) PAT (` cr) Variation (%) Act. vs Angel Act vs Con. Actual Angel Est. Cons. Act. vs Angel Act vs Con. Actual Angel Est. Cons. Act. vs Angel Act vs Con. (9.3) (4.7) 4.5 (7.6) (11.4) (2.4) (6.4) 0.8 (31.6) (4.6) (5.4) (4.1) 19.8 (9.2) (5.9) (4.3) 7.1 (2.4) NA 25 138 329 86 773 117 68 120 46 33 141 322 108 861 113 64 128 49 32 140 296 112 735 113 65 127 NA (25.4) (2.2) 2.3 (21.0) (10.2) 2.7 6.7 (5.8) (4.7) (2.3) (23.5) (1.3) 11.4 (23.7) 5.1 3.5 4.0 (5.6) NA (1.2) 1 3 134 4 107 23 34 24 8 690 8 7 118 16 199 25 30 33 12 674 9 10 113 22 142 28 31 32 NA 738 (92.8) (61.2) 13.9 (73.5) (46.3) (8.0) 11.5 (26.1) (31.6) 2.3 (93.6) (71.3) 18.3 (80.9) (24.7) (18.0) 7.9 (25.5) NA (6.5)

(0.2) 1,126

1,153 1,139

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Sector Review | Infrastructure

Top-line growth goes for a toss; worrying sign: Most of C&EPC players (ten
companies chosen for this analysis) have witnessed slowest growth on top-line front in 1QFY2012 on yoy basis in recent few quarters. This is evident from the exhibit below which shows that the average growth of the sector has come down to 12.1% from 18-30% band for past many quarters. We believe the dip in the yoy growth on top-line front is not a onetime phenomenon and there are issues on the execution front which will keep the growth under check going ahead

Exhibit 1: Sluggish revenue growth a cause of worry

35.0 30.0 25.0 20.0 15.0 10.0 5.0 18.3 12.1 25.7 25.4 21.8 22.0 29.6 26.1 23.0

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

Average yoy growth (%)

Source: Company, Angel Research, Note: Ten companies used for calculation of average growth trend are specified in first page table of Quarterly numbers

Exhibit 2: 1QFY2012 Top-line growth (yoy, %)

70.0 60.0 50.0 40.0 30.0 20.0 10.0 (10.0) (20.0) (30.0) 56.5 44.1 20.3 0.2 6.3 1.6 (1.1) (19.2) 5.1 7.1

Exhibit 3: Variance from expectations (%)

10.0 5.0 (5.0) (10.0) (15.0) (20.0) (25.0) (30.0) (35.0) (31.6) (4.7) (9.3) (7.6) (4.6) (11.4) (2.4) (6.4) 4.5 0.8

CCCL

HCC

MPL

JAL

CCCL

JAL

NCC

HCC

MPL

L&T

Simplex In.

Sadbhav

Sadbhav

IRB Infra

IRB Infra

NCC

L&T

Source: Company, Angel Research

Source: Company, Angel Research

August 18, 2011

Simplex In.

IVRCL

IVRCL

1QFY12

Sector Review | Infrastructure

Margins under pressure: For 1QFY2012, margins have broadly remained under pressure owing to high commodity prices and inflationary pressures.

Exhibit 4: 1QFY2012 OPM variation yoy (bp)

Simplex In. Sadbhav NCC MPL L&T JAL IVRCL IRB Infra HCC CCCL (600) (342) (400) (200) 200 400 (370) 40 (150) (90) 310 (70) (80) 50 340

Exhibit 5: Variance from expectations (bp)

Simplex In. Sadbhav NCC MPL L&T JAL IVRCL IRB Infra HCC CCCL (110) (200) (100) 100 200 300 400 500 (130) (120) 30 (30) 30 (50) 400 (70) 140

Source: Company, Angel Research

Source: Company, Angel Research

Earnings growth for the next couple of quarters of these C&EPC players would remain muted

Earnings under pressure for most C&EPC players: We have mentioned in our earlier notes (read 4QFY2011 review) that sector has done well on top-line front (during those times) but earnings are marred given high interest rates and inflationary pressures. But given the dismal top-line performance this time round we believe that problems on earnings front would accentuate further in times to come. Further, we are not expecting any softening on interest rates and commodity front in next three-six months which will put further pressure on earnings. We believe these are worrying signs given early monsoons this time, second quarter being seasonally the weakest quarter for C&EPC players and macro headwinds still surrounding the sector demonstrating that earnings growth for the next couple of quarters of these C&EPC players would remain muted. Exhibit 7: Variance from expectations (%)
20.0 (20.0) (8.0) (31.6) 13.9 11.5 2.3

Exhibit 6: 1QFY2012 Earnings growth (yoy, %)

20.0 (20.0) (40.0) (60.0) (80.0) (100.0) (96.9) (89.9) (85.0) (40.8) (43.8) (33.6) 14.2 1.2 18.0 32.4

CCCL

HCC

MPL

(26.1)

JAL

NCC

L&T

(40.0) (60.0)

(46.3) (73.5)

CCCL

JAL

HCC

MPL

Sadbhav

IRB Infra

NCC

L&T

Simplex In.

IVRCL

(80.0) (100.0) (92.8)

(61.2)

Source: Company, Angel Research

Source: Company, Angel Research

August 18, 2011

Simplex In.

Sadbhav

IRB Infra

IVRCL

Sector Review | Infrastructure

Valuations are at abysmal levels, but we continue to remain selective

Stock prices of C&EPC companies have taken a beating on the bourses after posting poor quarterly performance, bringing the stocks to very attractive levels on the valuations screen. But considering the various headwinds faced by the sector and no respite on the same we believe that stocks would feel the heat for some more time. Further, lack of positive news flow is not helping the sectors performance. Notwithstanding, this it should be noted that there is pertinent need of infrastructure in the country and the economy would get derailed from its high growth trajectory if these needs are not met, which is acknowledged by one and all. Hence, we believe that the long term growth story for the sector remains intact. However, we believe that stock specific approach would yield higher returns given the disparity among these companies and changing dynamics affecting them positively/negatively. Hence, in current uncertain times we remain positive on companies having 1) comfortable leverage position; 2) strong order book position; 3) undemanding valuations; 4) superior return ratios; and 5) less dependence on capital markets for raising equity for funding projects;. Hence, we maintain L&T, IVRCL and Sadbhav as our top picks in the C&EPC space (on the basis of exhibits below) and recommend IRB in the development space after its recent fall bringing IRB to attractive levels. L&T and SEL are the stand out companies in our coverage universe with comfortable leverage position

Exhibit 8: Comfortable leverage position L&T and SEL

16.0 14.0
J AL

Int. as % of Sales

12.0 10.0 8.0 6.0 4.0 2.0 0.5 1.0 1.5 2.0 2.5 Net Debt/Equity (x)
L & T SEL N CC CCCL Pa tel MPL I V RCL Sim plex HCC

Source: Company, Angel Research, Note: Size of bubble denotes interest cost as a % of EBITDA

August 18, 2011

Sector Review | Infrastructure

SEL, Simplex and IVRCL have strongest order book position in our coverage universe after HCC

Exhibit 9: Adj. OB/Sales at decent levels

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 4.2 3.2 2.7 2.1 2.1 3.0 2.8 2.2 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 -

Simplex

HCC

MPL

OB (` cr)
Source: Company, Angel Research

OB/Sales (x)

IVRCL is trading at very attractive level of valuations (0.4x P/BV FY2013E) and considering the latent potential in the company we believe that the Company can outperform in the long term

Exhibit 10: IVRCL trading at most attractive valuations on P/BV basis

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.6 1.1 1.4 0.4 1.1 0.7 0.5 2.2 3.4

Patel Eng.

CCCL

NCC

Sadbhav

IVRCL

1.0

P/BV (x)
Source: Company, Angel Research, Note: On FY2013E basis

August 18, 2011

Simplex In.

HCC

MPL

JAL

CCCL

IRB Infra

NCC

L&T

Sadbhav

IVRCL

Sector Review | Infrastructure

L&T and SEL have enjoyed superior return ratios in the past and we expect them to maintain their leadership position in future as well considering their order book position and execution lined up

Exhibit 11: ROACE trend

30.0 25.0 20.0 15.0 10.0 5.0 -

CCCL

NCC

ROACE FY2011
Source: Company, Angel Research

ROACE FY2012E

ROACE FY2013E

Exhibit 12: ROAE trend

25.0 20.0 15.0 10.0 5.0 -

CCCL

NCC

ROAE FY2011
Source: Company, Angel Research

ROAE FY2012E

ROAE FY2013E

August 18, 2011

Simplex In.

Sadbhav

IRB Infra

HCC

IVRCL

MPL

JAL

L&T

Simplex In.

Sadbhav

IRB Infra

HCC

IVRCL

MPL

JAL

L&T

Sector Review | Infrastructure

L&T and SEL are best placed companies on funding side both debt and equity. IVRCL, NCC, MPL and Patel are heavily dependent on capital markets for funding their projects

Exhibit 13: Angels view on liquidity position of infrastructure companies

Companies HCC IRB IVRCL JAL L&T MPL NCC Patel SEL ITNL Asset quality Funding of Captive Projects Overal

Worst
Source: Company, Angel Research,

Average

Good

Best

Exhibit 14: Quarterly numbers Angel vs. Consensus

Cos. Top line (` cr) Variation (%) EBITDA (` cr) Variation (%) PAT (` cr) Variation (%) Actual Angel Est. Cons. Act. vs Angel Act vs Con. Actual Angel Est. Cons. Act. vs Angel Act vs Con. Actual Angel Est. Cons. Act. vs Angel Act vs Con. CCCL HCC IRB Infra IVRCL JAL NCC Sadbhav 507 1,058 801 1,124 3,178 1,142 613 559 536 (9.3) (4.7) 4.5 (7.6) (11.4) (2.4) (6.4) 0.8 (31.6) (4.6) (5.4) (4.1) 19.8 (9.2) (5.9) (4.3) 7.1 (2.4) NA 25 138 329 86 773 117 68 120 46 33 141 322 108 861 113 64 128 49 32 140 296 112 735 113 65 127 NA (25.4) (2.2) 2.3 (21.0) (10.2) 2.7 6.7 (5.8) (4.7) (2.3) (23.5) (1.3) 11.4 (23.7) 5.1 3.5 4.0 (5.6) NA (1.2) 1 3 134 4 107 23 34 24 8 690 8 7 118 16 199 25 30 33 12 674 9 10 113 22 142 28 31 32 NA 738 (92.8) (61.2) 13.9 (73.5) (46.3) (8.0) 11.5 (26.1) (31.6) 2.3 (93.6) (71.3) 18.3 (80.9) (24.7) (18.0) 7.9 (25.5) NA (6.5)

1,110 1,103 767 669

1,217 1,238 3,588 3,377 1,170 1,193 655 572

Simplex In. 1,261 MPL L&T 329 9,483

1,251 1,292 481 NA

9,938 9,505

(0.2) 1,126

1,153 1,139

Source: Company, Angel Research

August 18, 2011

Sector Review | Infrastructure

Exhibit 15: Recommendation summary

Company CCCL HCC IRB Infra IVRCL JP Assoc. Punj Lloyd NCC Sadbhav Simplex In. Patel Engg. Madhucon L&T ITNL CMP TP (`) Rating FY11 Top line (` cr) FY12E FY13E CAGR (%) EPS (`) FY11 FY12E FY13E CAGR (%) Adj. P/E OB/ FY11 FY12E FY13E Sales(x)

21 27 137 37 58 56 55 142 263 97 65 176

- Neutral - Neutral 191 64 76 82 161 306 106 259 Buy Buy Buy Buy Accu. Buy Buy Buy Buy

2,199 4,093 2,438 5,651 7,850 5,074 2,209 4,896 3,499 1,705 4,049

2,362 4,723 3,024 5,798

2,646 5,485 3,995 6,994

9.7 15.8 28.0 11.2 15.5 18.3 14.8 13.9 12.7 1.2 19.5 22.9 26.5

2.5 1.2 13.6 5.9 3.1 (5.4) 6.4 8.0 25.1 18.4 6.9 54.7 22.3

1.5 0.7 13.0 4.3 3.6 2.5 5.5 8.4 22.3 17.1 6.7 64.9 23.9

3.6 1.2 14.5 6.3 5.0 4.0 6.7 11.4 30.6 16.7 8.4 80.0 25.3

18.4 1.0 3.3 3.3 28.0 2.4 19.6 10.4 (4.7) 10.2 20.9 6.4

8.3 4.1 1.7 18.9 4.1 8.6 10.5 0.8 2.6 21.7 0.3

14.0 4.3 2.4 16.1 22.6 4.7 8.1 11.8 0.9 2.7 18.3 0.3

5.9 3.9 1.6 11.5 13.9 3.9 6.0 8.6 0.9 2.2 14.8 0.3

2.8 4.2 4.2 3.0 3.2 3.2 2.9 2.7 3.5 3.1 5.5

13,217 15,043 17,630 9,585 10,992 5,755 2,602 5,373 3,272 1,898 4,910 6,689 2,865 6,221 3,587 2,434 6,484

- Neutral

- Neutral

1,625 1,946

44,089 55,597 66,551

Source: Company, Angel Research

Exhibit 16: SOTP break-up

Company CCCL HCC IRB Infra IVRCL JP Assoc. Punj Lloyd NCC Sadbhav Simplex In. Patel Engg. Madhucon L&T ITNL Core const. (`) 28 11 110 44 31 96 53 87 306 40 59 1,508 90 % to TP 100 26 58 69 41 100 65 54 100 33 55 77 35 (`) 23 24 2 47 2 Real estate % to TP 58 31 2 38 2 (`) 6 77 8 73 16 33 143 Road BOT % to TP 16 40 10 46 13 31 55 Invst. in subsidiaries (`) 5 20 438 % to TP 2 31 23 (`) 22 18 19 12 25 Others % to TP 29 22 16 12 10 Total (`) 28 40 191 64 76 96 82 161 306 122 106 1,946 259

Source: Company, Angel Research

August 18, 2011

Sector Review | Infrastructure

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Analyst ownership of the stock CCCL HCC IRB Infra IVRCL JP Assoc. Punj Lloyd NCC Sadbhav Simplex In. Patel Engg. Madhucon L&T ITNL No No No No No No No No No No No No No Angel and its Group companies ownership of the stock No No No No No No No No No No No No No Angel and its Group companies' Directors ownership of the stock No No No No No No No No No No No Yes No Broking relationship with company covered No No No No No No No No No No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 18, 2011