IDBI Capital on construction sector

Ordering opportunity for construction players pegged at US$109 bn between FY10-12E
We peg the ordering opportunity for construction companies at US$109 bn over the next two years led by acceleration in awarding of national highway
projects and increasing opportunities in the power sector. Road/power/irrigation/railway sector are expected to contribute 40%/24%/14%/13% of the
total orders.
􀂄 Infrastructure investment robust despite slippages
Despite slippages in meeting target, infrastructure investment (ex-storage, oil & gas and telecom) has seen a 17% CAGR in the past five years. In FY10,
infrastructure spending increased to US$69 bn or 5.8% of GDP (5.0% in FY04). As per revised projections, US$349 bn (ex-storage, oil & gas and telecom)
is expected to be invested in the 11th Plan (US$170 bn in the 10th Plan), with private sector contribution expected at 25% (22% in the 10th Plan).
􀂄 Strong order inflows in H2FY10 to accelerate revenue growth in H2FY11/FY12
Economic slowdown and general elections led to muted order inflows in H2FY09 and H1FY10. Order inflows, however, have picked-up since H2FY10 (up
74% YoY). Due to the back-ended nature of revenues, we expect our coverage universe (SINF, NJCC, IVRCL and HCC) to report a 16% YoY growth in
revenues for FY11 (8% YoY growth in Q1FY11) and 23% YoY growth for FY12.
􀂄 Risk-reward ratio favourable; SINF and NJCC our top-picks
After outperforming the broader markets during the pre-crisis period, construction stocks have been a consistent underperformer since May 2008. Against a
2% return generated by Sensex between May 2008 and August 2010, our coverage universe has delivered a negative 25% return.
With earnings momentum expected to pick-up in the coming quarters, select construction stocks are trading at attractive valuations (available at 9-12x our FY12
EPS). Within the construction space, we prefer SINF and NJCC due to their (1) diversified order book (2) better working capital position (3) conservative
approach to BOT projects and (4) attractive valuations. We have valued construction companies based on SOTP methodology. For the core construction
business, we have assigned earnings multiple in the range of 10-15x, based on certain quantitative and qualitative factors. The listed (unlisted) subsidiaries
of construction companies are valued at 30% discount to CMP (1x book value). We initiate coverage on SINF, NJCC and IVRCL with a BUY rating and
maintain our HOLD rating on HCC.