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Construction: Infrastructure
Equity Research
Is improvement in order inflow enough for sector to re-rate?
Significant slowdown in government capex, private capex flat
Our analysis of recent quarterly capex data from CMIE indicates a
significant slowdown in new capex investments, especially from the
government sector. New investments from the government sector over
Dec’10-Mar’11 are just 26% of the new investments over Dec’09-
Mar’10.Though we have seen a pick up in road award activity in Q1FY12,
the 3 quarters previous to that had also seen slowdown in transport
infrastructure projects, as well as government investments in the electricity
sector having been extremely poor over Sep’10-Mar’11. The private sector
has fared relatively better – with new investments (industrial and infra)
over Dec’09- Mar’10 down 21% yoy vs. govt. capex down by over 70%.
Pick up unlikely until structural issues are addressed
We remain skeptical of a pick up in order inflows in 2HFY12 on the back of
inflation and interest rates reversing. We believe the underlying reasons for the
weak capex and execution trends are structural as evidenced by weakening
data since the middle of last year (before cost of capital increased and before
political momentum was seemingly lost).
We believe addressing issues such as land acquisition, stable and fair
policies for infrastructure, consistent policy regarding environment and fuel
extraction (mining) could possibly return the capex cycle to growth levels
seen during 2005-2008. Lower cost of capital is a supporting element to the
capex cycle but would not a key enabler by itself, in our view.
Prefer companies with strong order books and WC efficiency
In the absence of any strong political consensus or debate evidenced so
far, we are not expecting solutions to structural issues to become evident
over the foreseeable future.
Hence, our preference in this uncertain environment is for companies with
– 1) Working Capital efficiency – enabling cash flow generation 2) Strong
order book coverage – providing visibility on growth and 3) Valuations that
are currently below historical median levels.
We continue to highlight L&T and BHEL for large cap exposure to the
sector (upgraded to Buy in Feb’11 and May’11 respectively). Our other
Buys are IRB, Sintex, NCC and ITNL.
Key Risks: 1) Aggressive bidding for orders 2) Volatile raw material prices
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Construction: Infrastructure
Equity Research
Is improvement in order inflow enough for sector to re-rate?
Significant slowdown in government capex, private capex flat
Our analysis of recent quarterly capex data from CMIE indicates a
significant slowdown in new capex investments, especially from the
government sector. New investments from the government sector over
Dec’10-Mar’11 are just 26% of the new investments over Dec’09-
Mar’10.Though we have seen a pick up in road award activity in Q1FY12,
the 3 quarters previous to that had also seen slowdown in transport
infrastructure projects, as well as government investments in the electricity
sector having been extremely poor over Sep’10-Mar’11. The private sector
has fared relatively better – with new investments (industrial and infra)
over Dec’09- Mar’10 down 21% yoy vs. govt. capex down by over 70%.
Pick up unlikely until structural issues are addressed
We remain skeptical of a pick up in order inflows in 2HFY12 on the back of
inflation and interest rates reversing. We believe the underlying reasons for the
weak capex and execution trends are structural as evidenced by weakening
data since the middle of last year (before cost of capital increased and before
political momentum was seemingly lost).
We believe addressing issues such as land acquisition, stable and fair
policies for infrastructure, consistent policy regarding environment and fuel
extraction (mining) could possibly return the capex cycle to growth levels
seen during 2005-2008. Lower cost of capital is a supporting element to the
capex cycle but would not a key enabler by itself, in our view.
Prefer companies with strong order books and WC efficiency
In the absence of any strong political consensus or debate evidenced so
far, we are not expecting solutions to structural issues to become evident
over the foreseeable future.
Hence, our preference in this uncertain environment is for companies with
– 1) Working Capital efficiency – enabling cash flow generation 2) Strong
order book coverage – providing visibility on growth and 3) Valuations that
are currently below historical median levels.
We continue to highlight L&T and BHEL for large cap exposure to the
sector (upgraded to Buy in Feb’11 and May’11 respectively). Our other
Buys are IRB, Sintex, NCC and ITNL.
Key Risks: 1) Aggressive bidding for orders 2) Volatile raw material prices
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