Construction – Positive: Daiwa

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Sector thesis: execution challenges in a robust macro environment
We are positive on the prospects for the Infrastructure Construction Sector over the
next six-to-12 months, as we expect execution to improve in 2H FY11 on the back
of robust order inflows and a better operating environment. Order accrual is not an
issue, but execution has been a drag over the past six months, which has led to
share prices in the sector underperforming the BSE Sensex. We believe valuations
are attractive, with PERs at 8-10x (adjusted for subsidiary valuations) based on our
FY12 forecasts. We see the key catalyst as better visibility on execution and the
funding of projects.


Structural outlook: three-year view
Infrastructure investment likely to accelerate over the next three years
We are Positive on the outlook for the Infrastructure Construction Sector for the
following reasons: 1) we expect infrastructure investment in the 12th Five Year
Plan to double to US$1,000bn over FY13-18, with 65% of the total going to power,
roads and railways (we expect the private sector to account for 50% of the
expenditure, up from 36% under the 11th Five Year Plan), 2) the strong government
focus on infrastructure, and 3) a rebound in economic growth and corporate capex
along with an improved liquidity scenario augur well for the sector over the next
three-to-five years.

Competitive intensity should increase
We expect competition from international and domestic players to increase
substantially across all segments. Currently, road assets are the most competitive
segment, and competitive intensity is increasing in the power business too.
However, given the strong increase in the volume of business, we do not expect any
significant erosion in the profitability of the companies. Moreover, the size of
orders is increasing, which we believe will result in operational efficiencies.