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Industrials & Infrastructure
Strong government spending on infrastructure and pick up in
corporate capex will serve as catalysts during 2011
Order book has expanded rapidly over past 18 months, and players
with adequate capital availability will outperform during 2011
Larsen & Toubro is our top sector pick
2011 sector outlook
Benefits from increased order inflow from pick up in
corporate capex, sustained infrastructure spending
and accelerated execution without capital constraints
are key themes to identify winners in the Indian
Industrial sector during 2011. Lack of sufficient
balance sheet liquidity to fund long-term assets had
hurt earnings growth of mid cap players during 2010
and we expect this risk to persist during 2011.
We expect the Power and Road sector to dominate
the infrastructure exposure of sector players and new
orders from these segments will act as share price
catalysts for the Industrials sector.
Power: We expect c40GW (cUSD36bn) of power
sector orders (combination of equipment and EPC)
to be placed over the next 2-3 years, which provides
reasonable visibility on future order inflows to
power equipment manufacturers and EPC players.
We also remain positive on the transmission
segment on expectations of accelerated capex
(USD5bn industry size with 25% FY12-14 CAGR).
However, the distribution segment is likely to sustain
losses owing to poor financial management.
Roads: We expect the Indian road ministry to award
c7,000-9,000kms (USD13-17bn) of national
highway projects and USD2-3bn of State Highway
projects during FY12, providing an additional driver
for infrastructure spending.
Corporate capex: Revival in corporate capex
(c15% CAGR over FY12-14), especially in Metals
(cUSD10-12bn of annual capex spend with18-20%
CAGR over FY12-14) and Cement (annual capex of
USD2-3bn with 20-25% CAGR over FY12-14) will
act as a key growth catalyst during FY12. Metals
capex is likely to be dominated by brownfield
expansion, and cement capex by greenfield capacity
expansion. We do not expect near-term pricing
weakness in the cement industry to impact long-term
capex as the cement demand outlook over the next 5
years remains robust. We also expect sustained
investment in the Oil & Gas sector (annual capex of
cUSD20bn), though growth is likely to remain
moderate at 5-6% during FY12.
2011 top pick
Larsen & Toubro, OW, TP INR2,341
Our top pick, L&T, has a unique presence across
both the infrastructure and corporate capex
segments. It is best positioned to capitalize on the
expected strong spend in 2011 owing to its scale of
operations and strength of its balance sheet
(consolidated net debt at 0.95x and net cash
position at the standalone entity). We forecast
L&T’s earnings to grow 26% (consolidated) on the
back of a 20% CAGR in order inflows during
FY11-13, with an increasing earnings contribution
from its subsidiaries (c21% of total earnings in
FY13, up from c12% in FY10). We believe the
strategic steps taken by L&T over the past 3-5
years, i.e. to diversify into growth segments like
power equipment manufacturing, nuclear power,
defence, and asset ownership, will start yielding
results over the next 3-5 years. Not only does this
reduce L&T’s cyclical business risk, it also gives it
a growth profile better than most mid-cap players
in the sector, justifying a premium valuation.
Our 12-month target price of INR2,341 includes
INR1,855 for the stand-alone entity (22x Sep
2012e EPS) and subsidiaries at INR486. Our
target implies a forward PE of 22.6x Sept 2012e
consolidated earnings. In the past 5 years, L&T
has traded in a range of 11-47x, and at an average
of 23.8x its one-year forward earnings.
Catalysts include potential order inflows from the
nuclear power sector (not factored currently),
successful bidding in new road projects assets,
and listing of its finance subsidiary.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials & Infrastructure
Strong government spending on infrastructure and pick up in
corporate capex will serve as catalysts during 2011
Order book has expanded rapidly over past 18 months, and players
with adequate capital availability will outperform during 2011
Larsen & Toubro is our top sector pick
2011 sector outlook
Benefits from increased order inflow from pick up in
corporate capex, sustained infrastructure spending
and accelerated execution without capital constraints
are key themes to identify winners in the Indian
Industrial sector during 2011. Lack of sufficient
balance sheet liquidity to fund long-term assets had
hurt earnings growth of mid cap players during 2010
and we expect this risk to persist during 2011.
We expect the Power and Road sector to dominate
the infrastructure exposure of sector players and new
orders from these segments will act as share price
catalysts for the Industrials sector.
Power: We expect c40GW (cUSD36bn) of power
sector orders (combination of equipment and EPC)
to be placed over the next 2-3 years, which provides
reasonable visibility on future order inflows to
power equipment manufacturers and EPC players.
We also remain positive on the transmission
segment on expectations of accelerated capex
(USD5bn industry size with 25% FY12-14 CAGR).
However, the distribution segment is likely to sustain
losses owing to poor financial management.
Roads: We expect the Indian road ministry to award
c7,000-9,000kms (USD13-17bn) of national
highway projects and USD2-3bn of State Highway
projects during FY12, providing an additional driver
for infrastructure spending.
Corporate capex: Revival in corporate capex
(c15% CAGR over FY12-14), especially in Metals
(cUSD10-12bn of annual capex spend with18-20%
CAGR over FY12-14) and Cement (annual capex of
USD2-3bn with 20-25% CAGR over FY12-14) will
act as a key growth catalyst during FY12. Metals
capex is likely to be dominated by brownfield
expansion, and cement capex by greenfield capacity
expansion. We do not expect near-term pricing
weakness in the cement industry to impact long-term
capex as the cement demand outlook over the next 5
years remains robust. We also expect sustained
investment in the Oil & Gas sector (annual capex of
cUSD20bn), though growth is likely to remain
moderate at 5-6% during FY12.
2011 top pick
Larsen & Toubro, OW, TP INR2,341
Our top pick, L&T, has a unique presence across
both the infrastructure and corporate capex
segments. It is best positioned to capitalize on the
expected strong spend in 2011 owing to its scale of
operations and strength of its balance sheet
(consolidated net debt at 0.95x and net cash
position at the standalone entity). We forecast
L&T’s earnings to grow 26% (consolidated) on the
back of a 20% CAGR in order inflows during
FY11-13, with an increasing earnings contribution
from its subsidiaries (c21% of total earnings in
FY13, up from c12% in FY10). We believe the
strategic steps taken by L&T over the past 3-5
years, i.e. to diversify into growth segments like
power equipment manufacturing, nuclear power,
defence, and asset ownership, will start yielding
results over the next 3-5 years. Not only does this
reduce L&T’s cyclical business risk, it also gives it
a growth profile better than most mid-cap players
in the sector, justifying a premium valuation.
Our 12-month target price of INR2,341 includes
INR1,855 for the stand-alone entity (22x Sep
2012e EPS) and subsidiaries at INR486. Our
target implies a forward PE of 22.6x Sept 2012e
consolidated earnings. In the past 5 years, L&T
has traded in a range of 11-47x, and at an average
of 23.8x its one-year forward earnings.
Catalysts include potential order inflows from the
nuclear power sector (not factored currently),
successful bidding in new road projects assets,
and listing of its finance subsidiary.
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