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Healthy Order Inflow to Continue
India to invest a total of USD514bn in 11th plan; ~USD1trn in 12th plan —
The government has set out aggressive targets for investment in
infrastructure in India. Bulk of these investments is in the power sector (32-
38%) and the roads sector (14%). Going forward; the primary mode of
implementation will be via the Public-Private Partnership model (PPP
model). This translates to a huge opportunity for infrastructure and
engineering and construction companies.
But sector continues to underperform – Most of the infrastructure and
construction stocks have underperformed the broader indices by a broad
margin (>30%). This is driven by 1) slower than expected execution, 2)
Specific problems due to slowdown in Andhra Pradesh problems, 3)
extended monsoons.
Key trends that will drive earnings and stock performance – We expect
healthy order-inflows for the sector and execution should pick up in
H2FY11. We believe that margins should decline as competitive intensity
should put pressure on pricing. The key element to determine profitability
would be interest costs – and the ability of the companies to manage
working capital and leverage.
Larsen and Toubro – Execution has picked up momentum, which is evident
from the fact that 2QFY11 PAT was up 22% YoY despite strong monsoons.
Company is on track to meet its full-year order inflow guidance of Rs870bn,
up 25% YoY. Order backlog of Rs1154bn in 2QFY11was up 41% YoY. L&T
remains best play on India’s infrastructure capex given its execution
abilities, and diverse skill sets.
IVRCL – The stock is down 35% over the past year. 49% underperformance
vs Sensex factors in a lot of negatives. We believe that the core business has
stabilized and current stock price factors in less than satisfactory execution
track record.
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