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India Equity Research Reports, IPO and Stock News
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Gloomy environment to prevail
Decent top-line growth + Lower EBITDAM/high interest cost = Bottom-line
decline: Most infrastructure players (10 companies chosen for this analysis)
witnessed decent yoy growth (average 17.3%) on the top-line front in 2QFY2012.
We had mentioned in our 1QFY2012 note that sluggish performance on the
execution front could be a worrying sign for C&EPC companies given the
headwinds faced by the sector, but 2QFY2012’s better-than-expected
performance on the top-line front has been heartening. EBITDAM for the quarter
broadly remained under pressure, owing to high commodity prices and
inflationary pressures. Consistent hike in repo rates by the RBI (in order to contain
inflation) accentuated the already high interest cost for companies in the sector.
On the earnings front, high interest cost (owing to a high interest rate regime and
increased debt levels) coupled with EBITDAM compression resulted in a decline in
the bottom line for most companies under our coverage.
Valuations continue to remain at abysmal levels; Lack of catalyst in sight +
Persistent headwinds = Subdued performance to continue: Stock prices of
infrastructure companies continued to take a beating on the bourses, bringing the
stocks to very attractive levels on the valuation screen, even on subdued earnings
estimates. However, lack of positive news flow from companies per se and
persistent headwinds faced by the industry – such as high interest rates, policy
inaction, slower-than-anticipated revival in industrial capex – led to
underperformance of infrastructure stocks on the bourses. Therefore, given no
visible signs of reversal of trends, we continue with our view that the performance
of the sector will remain subdued.
We prefer to remain selective: We believe that stock-specific approach would yield
higher returns given the disparity among these companies and changing
dynamics affecting them positively/negatively. Hence, in the current uncertain
times, we remain positive on companies having 1) a comfortable leverage
position (L&T and Sadbhav); 2) strong order book position (L&T and IVRCL);
3) undemanding valuations (IVRCL); 4) superior return ratios (L&T and Sadbhav);
and 5) less dependence on capital markets for raising equity for funding projects
(L&T and Sadbhav). Hence, we maintain L&T, IVRCL and Sadbhav as our top
picks in the C&EPC space and recommend IRB in the development space after its
recent fall, which has brought the stock to attractive levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gloomy environment to prevail
Decent top-line growth + Lower EBITDAM/high interest cost = Bottom-line
decline: Most infrastructure players (10 companies chosen for this analysis)
witnessed decent yoy growth (average 17.3%) on the top-line front in 2QFY2012.
We had mentioned in our 1QFY2012 note that sluggish performance on the
execution front could be a worrying sign for C&EPC companies given the
headwinds faced by the sector, but 2QFY2012’s better-than-expected
performance on the top-line front has been heartening. EBITDAM for the quarter
broadly remained under pressure, owing to high commodity prices and
inflationary pressures. Consistent hike in repo rates by the RBI (in order to contain
inflation) accentuated the already high interest cost for companies in the sector.
On the earnings front, high interest cost (owing to a high interest rate regime and
increased debt levels) coupled with EBITDAM compression resulted in a decline in
the bottom line for most companies under our coverage.
Valuations continue to remain at abysmal levels; Lack of catalyst in sight +
Persistent headwinds = Subdued performance to continue: Stock prices of
infrastructure companies continued to take a beating on the bourses, bringing the
stocks to very attractive levels on the valuation screen, even on subdued earnings
estimates. However, lack of positive news flow from companies per se and
persistent headwinds faced by the industry – such as high interest rates, policy
inaction, slower-than-anticipated revival in industrial capex – led to
underperformance of infrastructure stocks on the bourses. Therefore, given no
visible signs of reversal of trends, we continue with our view that the performance
of the sector will remain subdued.
We prefer to remain selective: We believe that stock-specific approach would yield
higher returns given the disparity among these companies and changing
dynamics affecting them positively/negatively. Hence, in the current uncertain
times, we remain positive on companies having 1) a comfortable leverage
position (L&T and Sadbhav); 2) strong order book position (L&T and IVRCL);
3) undemanding valuations (IVRCL); 4) superior return ratios (L&T and Sadbhav);
and 5) less dependence on capital markets for raising equity for funding projects
(L&T and Sadbhav). Hence, we maintain L&T, IVRCL and Sadbhav as our top
picks in the C&EPC space and recommend IRB in the development space after its
recent fall, which has brought the stock to attractive levels.
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