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India Equity Research Reports, IPO and Stock News
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India: Industrials
Equity Research
Slowdown in capex continues: Sector at trough valuations; add IRB and Sintex to CL
Slowdown in capex unlikely to reverse soon
– policy and not rates are more critical
We believe the structural issues surrounding policy
and regulations have yet to stabilize and turn
supportive; although interest rates may turn in the
medium term providing a modest boost to capex.
Infrastructure stocks valuations at historical
trough – capital goods below median
Earnings expectations have compressed for the
sector by 20% ytd – but we still see downside.
Higher leverage infra/construction names are
already at trough valuations – stronger balance
sheet capital goods names have outperformed so
far. We remain selective on our stock picks.
Add IRB and Sintex to Buy Conviction List
IRB: Down 35% ytd, generates 1/5th of market cap
in cash (US$200mn) post interest and taxes p.a. –
currently below ex-growth price, 1.5X 12-m P/B.
Sintex: Down 25% ytd, close to historical trough at
6X 12-m P/E, non-discretionary spend on social
infra and mass housing ensures growth (+20% for
next 24-m) and returns (c.20% ROE) remain high.
Remain selective – L&T’s execution to drive
earnings surprise despite weak macro
Asset owners: We prefer stocks with high cash
generation, hedged against inflation and low
policy change risk – like IRB and ITNL. We are less
enthusiastic about GMR and GVK despite their
attractive P/Bs.
Engineering: We like L&T for its resilience in a
tough environment with strong sales growth and
reasonable valuations; and Sintex for its consistent
execution with high returns and cheap multiples.
Construction: Companies here have weak
business models that suffer on multiple fronts –
NCC is our relative preference.
D/G Cummins to Sell; U/G Punj to Neutral
Cummins to Sell from Neutral on slower growth in
FY12E-FY13E and expensive current valuations.
BHEL to Neutral from Buy due to reduced visibility
on new power generation orders and recent relative
outperformance.
Punj to Neutral from Sell with the stock currently
substantially below previous trough valuations.
click on links below for company reports:
Container Corporation of India (CCRI.BO, Sell)
Substantial slowdown underway: Remain selective on stocks
Data from RBI, Centre for Monitoring Indian Economy (CMIE), and industry participants indicates that the slowdown in new project
announcements, completions, and actual starts is continuing. We believe the earlier core challenges faced by the sector have
become more pronounced, namely land acquisition, fuel availability, and stable policies, which has lead to the current slowdown.
Although the government has initiated processes to address these issues (please refer to our previous report for details: New LA
bill: reflecting the tough realities of acquiring land today, published July 31, 2011), the resolution and eventual outcome of these
issues lie beyond medium-term visibility, in our view.
Although the increase in borrowing costs seen over the past 3 months has also impacted incremental capex commitments recently,
a possible turnaround on rates next year (our GS Global ECS Research team forecast a 100bp cut in RBI base rates over FY13) could
provide a modest medium-term boost.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Industrials
Equity Research
Slowdown in capex continues: Sector at trough valuations; add IRB and Sintex to CL
Slowdown in capex unlikely to reverse soon
– policy and not rates are more critical
We believe the structural issues surrounding policy
and regulations have yet to stabilize and turn
supportive; although interest rates may turn in the
medium term providing a modest boost to capex.
Infrastructure stocks valuations at historical
trough – capital goods below median
Earnings expectations have compressed for the
sector by 20% ytd – but we still see downside.
Higher leverage infra/construction names are
already at trough valuations – stronger balance
sheet capital goods names have outperformed so
far. We remain selective on our stock picks.
Add IRB and Sintex to Buy Conviction List
IRB: Down 35% ytd, generates 1/5th of market cap
in cash (US$200mn) post interest and taxes p.a. –
currently below ex-growth price, 1.5X 12-m P/B.
Sintex: Down 25% ytd, close to historical trough at
6X 12-m P/E, non-discretionary spend on social
infra and mass housing ensures growth (+20% for
next 24-m) and returns (c.20% ROE) remain high.
Remain selective – L&T’s execution to drive
earnings surprise despite weak macro
Asset owners: We prefer stocks with high cash
generation, hedged against inflation and low
policy change risk – like IRB and ITNL. We are less
enthusiastic about GMR and GVK despite their
attractive P/Bs.
Engineering: We like L&T for its resilience in a
tough environment with strong sales growth and
reasonable valuations; and Sintex for its consistent
execution with high returns and cheap multiples.
Construction: Companies here have weak
business models that suffer on multiple fronts –
NCC is our relative preference.
D/G Cummins to Sell; U/G Punj to Neutral
Cummins to Sell from Neutral on slower growth in
FY12E-FY13E and expensive current valuations.
BHEL to Neutral from Buy due to reduced visibility
on new power generation orders and recent relative
outperformance.
Punj to Neutral from Sell with the stock currently
substantially below previous trough valuations.
click on links below for company reports:
IRB Infrastructure (IRBI.BO, Buy, add to Conviction List)
Larsen & Toubro (LART.BO, Buy)
Sintex Industries (SNTX.BO, Buy, add to Conviction List)
IL&FS Transportation (ILFT.BO, Buy)
NCC Limited (NCCL.BO, Buy)
Cummins India (CUMM.BO): Downgrade to Sell
Thermax (THMX.BO, Sell)
Container Corporation of India (CCRI.BO, Sell)
Punj Lloyd (PUJL.BO): Upgrade to Neutral from Sell
Bharat Heavy Electricals Ltd (BHEL.BO: Downgrade to Neutral from Buy)
Jaiprakash Associates (JAIA.BO, Neutral)
GMR Infrastructure (GMRI.BO, Neutral)
GVK Power & Infrastructure (GVKP.BO, Neutral)
IVRCL Infrastructure & Projects (IVRC.BO, Neutral)
BGR Energy (BGRE.BO, Neutral)
Voltas (VOLT.BO, Neutral)
Substantial slowdown underway: Remain selective on stocks
Data from RBI, Centre for Monitoring Indian Economy (CMIE), and industry participants indicates that the slowdown in new project
announcements, completions, and actual starts is continuing. We believe the earlier core challenges faced by the sector have
become more pronounced, namely land acquisition, fuel availability, and stable policies, which has lead to the current slowdown.
Although the government has initiated processes to address these issues (please refer to our previous report for details: New LA
bill: reflecting the tough realities of acquiring land today, published July 31, 2011), the resolution and eventual outcome of these
issues lie beyond medium-term visibility, in our view.
Although the increase in borrowing costs seen over the past 3 months has also impacted incremental capex commitments recently,
a possible turnaround on rates next year (our GS Global ECS Research team forecast a 100bp cut in RBI base rates over FY13) could
provide a modest medium-term boost.
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