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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Our Infra top picks are Larsen and JSPL
At first glance, the intense bidding by equipment suppliers in NTPC's recent bulk
tender could be viewed as a sign of shifting bargaining power to developers. Yet,
it is premature to make that conclusion. The majority of power developers require
restructuring/equity injection, leaving space for players with strong balance sheets,
such as JSPL, to grow inorganically at cheap valuations. On the contrary, the
uptick in the capex cycle in E&C may offset slack in power orders to the benefit of
diversified players such as L&T. We reiterate L&T and JSPL as our top Infra picks.
Can equipment suppliers make double-digit margins?
Yes, if one were to believe the players that have won the bids... In a conference
call after it won the turbine generator (TG) bid, BGR Energy (unrated, INR362/sh)
stated that it could reach double-digit margins from this order. From its investor
communiqué, it looked more like it was based on assumptions of cheaper
sourcing of components and of a slowdown in China. A few industry observers
pointed out that there could be a material difference between the scope of this
tender vs. earlier bids, as few of the components may not be part of the bid.
However, a few other equipment suppliers, which were not L1, suggested that
the bids look aggressive and it is only with challenging assumptions that one could
make reasonable margins on the project wins. From our stand point, the bid
results showed JVs of Japanese partners as more keen to win the project than
those with European partners. This is surprising as the Japanese yen (JPY) has
appreciated against the US dollar (USD) as well as the rupee (INR) and the bid had
a substantial component of pricing linked to USD.
Can developers benefit if cost/MW for new capex drops?
Clearly, rising competition among the equipment suppliers should benefit the
developers if they start ordering. But according to our sectoral database, we find
that many power developers struggle with either cheap fuel scarcity or contracted
tariffs, which allow little or no fuel price pass-through. A few are also facing
hurdles for environmental clearances and accordingly, are making the sector open
up for potential consolidation.
At current levels, JSPL and Larsen are our top picks; regulation possible risk
Our top two Infra picks are L&T and JSPL. Both stocks appear compelling at
current levels of valuation. In the case of L&T, the core E&C business is trading at
15x FY13e P/E (less than that during the Lehman Brothers crisis) on our estimates,
which are 12% below consensus. For JSPL, the stock is trading at 9x FY13e P/E,
which looks quite reasonable, especially since we think the company might also
consider inorganic growth options. Our target prices on both JSPL and L&T are
based on a sum-of-the-parts methodology. (See page 7.) Key risks are: 1) adverse
regulatory action to curtail a hike in power tariffs and 2) the revival of the
investment cycle being a 12-month call; however, the near-term stock
performance may be held back by the likelihood of earnings downgrades on the
Street and global macro headwinds.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Our Infra top picks are Larsen and JSPL
At first glance, the intense bidding by equipment suppliers in NTPC's recent bulk
tender could be viewed as a sign of shifting bargaining power to developers. Yet,
it is premature to make that conclusion. The majority of power developers require
restructuring/equity injection, leaving space for players with strong balance sheets,
such as JSPL, to grow inorganically at cheap valuations. On the contrary, the
uptick in the capex cycle in E&C may offset slack in power orders to the benefit of
diversified players such as L&T. We reiterate L&T and JSPL as our top Infra picks.
Can equipment suppliers make double-digit margins?
Yes, if one were to believe the players that have won the bids... In a conference
call after it won the turbine generator (TG) bid, BGR Energy (unrated, INR362/sh)
stated that it could reach double-digit margins from this order. From its investor
communiqué, it looked more like it was based on assumptions of cheaper
sourcing of components and of a slowdown in China. A few industry observers
pointed out that there could be a material difference between the scope of this
tender vs. earlier bids, as few of the components may not be part of the bid.
However, a few other equipment suppliers, which were not L1, suggested that
the bids look aggressive and it is only with challenging assumptions that one could
make reasonable margins on the project wins. From our stand point, the bid
results showed JVs of Japanese partners as more keen to win the project than
those with European partners. This is surprising as the Japanese yen (JPY) has
appreciated against the US dollar (USD) as well as the rupee (INR) and the bid had
a substantial component of pricing linked to USD.
Can developers benefit if cost/MW for new capex drops?
Clearly, rising competition among the equipment suppliers should benefit the
developers if they start ordering. But according to our sectoral database, we find
that many power developers struggle with either cheap fuel scarcity or contracted
tariffs, which allow little or no fuel price pass-through. A few are also facing
hurdles for environmental clearances and accordingly, are making the sector open
up for potential consolidation.
At current levels, JSPL and Larsen are our top picks; regulation possible risk
Our top two Infra picks are L&T and JSPL. Both stocks appear compelling at
current levels of valuation. In the case of L&T, the core E&C business is trading at
15x FY13e P/E (less than that during the Lehman Brothers crisis) on our estimates,
which are 12% below consensus. For JSPL, the stock is trading at 9x FY13e P/E,
which looks quite reasonable, especially since we think the company might also
consider inorganic growth options. Our target prices on both JSPL and L&T are
based on a sum-of-the-parts methodology. (See page 7.) Key risks are: 1) adverse
regulatory action to curtail a hike in power tariffs and 2) the revival of the
investment cycle being a 12-month call; however, the near-term stock
performance may be held back by the likelihood of earnings downgrades on the
Street and global macro headwinds.
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