Visit http://indiaer.blogspot.com/ for complete details Challenging quarter on good monsoon
We remain positive on the Construction sector, due to
its potential and current valuation. A good monsoon
would impact Q2FY11E revenue numbers for companies
like IVRCL Infra HCC and Era Infra which possess
substantial road projects under execution. We believe
Ahluwalia Contracts, Nagarjuna Constructions and
CCCL will be relatively less impacted. FY12 revenue is
likely to witness limited risk. Hence we maintain our
positive stance on the sector and retain Ahluwalia
Contracts as our top pick in the construction sector
coverage universe.
Sector seasonality bad for 2Q revenue: 2Q revenue
for construction companies is low because of the
monsoon impact. We factor in YoY growth of 25% for
our coverage construction companies composite v/s
32%, 28% and 35% growth for second, third, and fourth
year seasonality growth, respectively.
Companies likely to disappoint: Companies with
substantial exposure to road projects are expected to
disappoint more than players with substantial
exposure to other segments. Hence, we believe IVRCL
Infra, HCC and Era Infra will be more impacted.
Companies less likely to disappoint: We believe
companies like Nagarjuna Construction, CCCL and
Ahluwalia Contracts, that have diversified segmental
presence, are less likely to disappoint on this year’s
better monsoons.
Order-inflow strong during the quarter: Order-inflow
of Rs58bn for construction companies under our
coverage (includes only disclosed order on BSE) since
July-to-date. However, we believe, that the order-book
for coverage companies is less of an issue, since most
have decent book-to-bill ratio.
We maintain a positive view on the construction
sector: Construction stocks have underperformed the
Sensex since our sector initiation. Hence, we believe
that post-Q2FY11 results would be a good entry point
for investors looking for an entry in stocks like IVRCL
Infra, HCC and Era Infra (based on the disappointment
regarding good monsoons impacting revenue). We
retain Ahluwalia Contracts as our top buy in our
construction universe.
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