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Don't jump the gun – valuations attractive but reversal awhile away
Significant slowdown in capex continues – projects under
implementation
End-Sept 2011 data from CMIE indicates that the significant slowdown in
new capex investment continued for the fourth consecutive quarter, and is
equally prevalent now across both the Industrial and Infrastructure
segments and contributed to both by Government and Private investments.
The quarterly rate of new investment in Infrastructure and industry for Sept
was $57bn, 64% lower than the peak achieved in the June 2010 quarter.
As a result of this continued delay in new project starts, growth in projects
under implementation is at 10% yoy, the lowest since Dec 2004. As we
have flagged before, 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.
Any reversal would be gradual – policy and rates both are critical
Although the government has initiated recent processes to address core
sector issues (such as Land acquisition, Fuel security, Environment
clearance, etc.) which could restore capex momentum to growth levels
seen earlier, we believe the eventual solution to these is not easy and any
impact thereof lies beyond medium-term visibility. A possibly lower cost of
capital (6m onwards) would be a supporting element to the capex cycle but
would not be a key enabler by itself, in our view.
Prefer companies with stable business model, low regulatory risk
Our preference in this uncertain environment is for companies within the
roads space due to: 1) more stable regulations and lower dependence on
external factors like fuel linkage etc. – we prefer IRB (IRBI.BO, CL-Buy, Oct.
7 close Rs163) and IL&FS Transportation (ILFS.BO, Buy, Rs200); 2)
stronger visibility on revenue due to order book in construction and
relatively stable toll revenue collections; 3) it being the only sector where
revenue is positively impacted by higher inflation; and 4) valuations that
are currently below historical median levels – IRB is trading at 12-m fwd
P/B of 1.8X vs. 3-yr historical median multiple of 2.8X, and ITNL is at 1.4X
12-m fwd P/B vs. historical median of 2.1X. We also like L&T (LART.BO,
Buy, Rs1,393) due to its strong order book coverage of over 3X and
reasonable valuations, at 12-m fwd P/B of 2.7X vs. 5-yr median of 5X.
Key risks: Aggressive bidding for orders, volatile raw material prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Don't jump the gun – valuations attractive but reversal awhile away
Significant slowdown in capex continues – projects under
implementation
End-Sept 2011 data from CMIE indicates that the significant slowdown in
new capex investment continued for the fourth consecutive quarter, and is
equally prevalent now across both the Industrial and Infrastructure
segments and contributed to both by Government and Private investments.
The quarterly rate of new investment in Infrastructure and industry for Sept
was $57bn, 64% lower than the peak achieved in the June 2010 quarter.
As a result of this continued delay in new project starts, growth in projects
under implementation is at 10% yoy, the lowest since Dec 2004. As we
have flagged before, 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.
Any reversal would be gradual – policy and rates both are critical
Although the government has initiated recent processes to address core
sector issues (such as Land acquisition, Fuel security, Environment
clearance, etc.) which could restore capex momentum to growth levels
seen earlier, we believe the eventual solution to these is not easy and any
impact thereof lies beyond medium-term visibility. A possibly lower cost of
capital (6m onwards) would be a supporting element to the capex cycle but
would not be a key enabler by itself, in our view.
Prefer companies with stable business model, low regulatory risk
Our preference in this uncertain environment is for companies within the
roads space due to: 1) more stable regulations and lower dependence on
external factors like fuel linkage etc. – we prefer IRB (IRBI.BO, CL-Buy, Oct.
7 close Rs163) and IL&FS Transportation (ILFS.BO, Buy, Rs200); 2)
stronger visibility on revenue due to order book in construction and
relatively stable toll revenue collections; 3) it being the only sector where
revenue is positively impacted by higher inflation; and 4) valuations that
are currently below historical median levels – IRB is trading at 12-m fwd
P/B of 1.8X vs. 3-yr historical median multiple of 2.8X, and ITNL is at 1.4X
12-m fwd P/B vs. historical median of 2.1X. We also like L&T (LART.BO,
Buy, Rs1,393) due to its strong order book coverage of over 3X and
reasonable valuations, at 12-m fwd P/B of 2.7X vs. 5-yr median of 5X.
Key risks: Aggressive bidding for orders, volatile raw material prices.
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