India: Construction: Infrastructure
Mind the 2Q gap – rains could dampen billings this quarter
Exceptionally strong rains, especially in key construction states
Monsoon rains this year continue to be very strong, especially compared
with below-normal rains last year. Rainfall over the first 20 days of
September (usually marking the end of the monsoon) is in strong contrast
to last year, potentially putting pressure on revenue billings and further
delaying large-scale construction pickup for construction companies, in our
view. Given this rain-led challenge and richer valuations this year, the gap
with market expectations could pose a risk as we go into earnings next
month.
Valuations look fair, pricing in strong order pickup in 2HFY11
Although the order inflow cycle has improved, the execution rate has
become stretched (due to the higher proportion of longer-gestation infra
projects). This is putting incremental pressure on 2H results to meet Street
expectations – leaving little room for positive earnings surprises for the
current year, in our view.
Weak signals from suppliers and construction companies
Our channel checks with construction companies and suppliers (cement,
long steel, paint) suggest there were orders over the last three months but
customers are delaying pickup of materials as rains were stronger than
normal.
Prefer companies with stable earnings streams and relatively
smaller construction risk
We prefer Buy-rated stocks IRB (12-m TP Rs345) and ITNL (12-m TP Rs372),
implying 21% and 12% upside, respectively, from current levels. Even
though both these companies are being impacted by the monsoon-related
slowdown, relative impact on overall earnings tends to be lower as they
are cushioned by toll and annuity earnings.
Our other Buy-rated stocks in the construction space are IVRCL (12-m TP
Rs209) and JPA (12-m TP Rs168); for both these stocks, we expect that,
despite slow Q2FY11 billings, yoy growth will be strong in FY11E (18% and
34%, respectively) due to strong accumulated order books and relatively
reasonable valuations compared to those of its peers.
Risks: Rising interest rates; unfavorable regulatory changes to the
infrastructure sector.
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