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India infrastructure
Crisis of confidence
Stress test on Indian Infra space
Given the macro uncertainty, we undertake a stress test on our coverage
universe for worsening order inflow, slower execution and the worsening working
capital situation. Our analysis suggests that balance sheet strength is a key
determinant of earnings risk. The depressed valuations and lower expectations
provide an excellent opportunity to selectively accumulate some of the infra
names, in our view.
The Capital Goods segment has the lowest revenues and earnings downside
in the Infrastructure space, given order backlogs and robust balance sheets.
We also believe this segment would lead the Infrastructure sector’s recovery,
which is likely to be led by private sector capex.
Mid-cap construction and infrastructure earnings are precariously placed, as
any further pressure on balance sheets can lead to very large downsides.
Private capex recovery may lead infrastructure spending
Domestic order inflows are likely to remain under pressure in FY12, as the
infrastructure sector would continue to struggle with clearances and lack of
regulatory push. Roads and urban infra continue to show signs of life, while the
power segment is in dire need of reforms. Private sector capex is more likely to
rebound, as utilisation rates across industries are healthy, and corporate balance
sheets are at among the lowest leverage levels seen in the past ten years.
However, private investments would also need improvement in confidence
before capital is committed.
Valuation – time to cherry-pick ahead of cyclical upturn
Historical data suggests the infra sector behaves like high beta names as and
when market firmly believes that interest rates have peaked out. There is no
doubt sector would need some positive newsflow from the policy action. Our
house view remains that interest rates have peaked, given the heightened global
uncertainties. This should make for interesting investing opportunities in the
space, which has underperformed over last 1year (NIFTY has fallen by 19%,
CNX-Infra index has fallen by 32%)
We prefer the capital goods space, given the likelihood of private capex cycle
starting ahead of infrastructure spends. Moreover, downside in this space is
limited, in our view, given the strong balance sheets.
L&T is our top pick in the space as it is well placed to capitalise on any upturn
in any of the sub-segments coupled with valuations at 25% discount to long
term average.
GPPV is our top pick in the infra developers space as it is going through
serious ramp up in capacity utilisation leading to margin improvement and
sharp decline in leverage.
Among high-beta names, we favour GMR and NJCC as requirement for
funding is limited compared to peers in the space. IVRCL, JPA remain our
least favoured names, and we will remain bearish until we serious
improvement in balance sheets. .
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India infrastructure
Crisis of confidence
Stress test on Indian Infra space
Given the macro uncertainty, we undertake a stress test on our coverage
universe for worsening order inflow, slower execution and the worsening working
capital situation. Our analysis suggests that balance sheet strength is a key
determinant of earnings risk. The depressed valuations and lower expectations
provide an excellent opportunity to selectively accumulate some of the infra
names, in our view.
The Capital Goods segment has the lowest revenues and earnings downside
in the Infrastructure space, given order backlogs and robust balance sheets.
We also believe this segment would lead the Infrastructure sector’s recovery,
which is likely to be led by private sector capex.
Mid-cap construction and infrastructure earnings are precariously placed, as
any further pressure on balance sheets can lead to very large downsides.
Private capex recovery may lead infrastructure spending
Domestic order inflows are likely to remain under pressure in FY12, as the
infrastructure sector would continue to struggle with clearances and lack of
regulatory push. Roads and urban infra continue to show signs of life, while the
power segment is in dire need of reforms. Private sector capex is more likely to
rebound, as utilisation rates across industries are healthy, and corporate balance
sheets are at among the lowest leverage levels seen in the past ten years.
However, private investments would also need improvement in confidence
before capital is committed.
Valuation – time to cherry-pick ahead of cyclical upturn
Historical data suggests the infra sector behaves like high beta names as and
when market firmly believes that interest rates have peaked out. There is no
doubt sector would need some positive newsflow from the policy action. Our
house view remains that interest rates have peaked, given the heightened global
uncertainties. This should make for interesting investing opportunities in the
space, which has underperformed over last 1year (NIFTY has fallen by 19%,
CNX-Infra index has fallen by 32%)
We prefer the capital goods space, given the likelihood of private capex cycle
starting ahead of infrastructure spends. Moreover, downside in this space is
limited, in our view, given the strong balance sheets.
L&T is our top pick in the space as it is well placed to capitalise on any upturn
in any of the sub-segments coupled with valuations at 25% discount to long
term average.
GPPV is our top pick in the infra developers space as it is going through
serious ramp up in capacity utilisation leading to margin improvement and
sharp decline in leverage.
Among high-beta names, we favour GMR and NJCC as requirement for
funding is limited compared to peers in the space. IVRCL, JPA remain our
least favoured names, and we will remain bearish until we serious
improvement in balance sheets. .
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