Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations; add IRB and Sintex to CL

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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:

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)

Hindustan Construction (HCNS.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.

Voltas (VOLT.BO, Neutral) Muted order inflow :: Goldman Sachs,

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Voltas (VOLT.BO, Neutral)
Muted order inflow to hamper future revenue growth and returns – recovery in its Middle East
business can improve earnings prospects; we maintain our Neutral rating on Voltas
 Voltas’s core strength lies in its execution as a heating, ventilation, and air conditioning (HVAC) specialist
both in India and the Middle East.
 The company has maintained its asset-light model with a low working capital ratio – the company’s strength
lies in operating cash generation (4% of sales for FY11).
 Voltas has seen limited order inflow from international markets post the downturn in 2008 – order inflows
have not recovered since then.
 We forecast revenue growth to remain low as we do not expect a significant increase in orders either from
the Middle East or from domestic segment over next 6-12 months. Any improvement thereafter would only
impact 2H FY13E earnings.
 We expect low revenue growth to hamper the company’s ROE and therefore we forecast it to decline from an
average of 29% between FY05 and FY11 to 23% in FY10-FY13 as revenue growth slows in FY11-FY13E to 7%
vs. an average of 22% between FY05 and FY11.
 We expect the unitary cooling product (UCP) segment to be a key earnings driver for the company over the
next few years as demand for air conditioning products rises in India. We forecast the segment to grow at a
CAGR of 13% over FY11-FY13, contributing about 33% to the company’s overall revenue.
 We lower our FY12-FY14 EPS estimates by 8%-22% as we factor in lower inflows for the company’s heating
segment as well as the impact resulting from the loss of operating leverage on its EBIT margins.
Valuation
 We maintain our Neutral rating on Voltas given limited order inflow is likely to hamper future revenue
growth. We lower our 12-month target price on the stock to Rs154 (from Rs194), based on a 14X P/E to our
rolled forward average of FY12E-13E EPS (vs. 15X previously and at a 7% discount to our 15X target multiple
on BHEL, similar to the discount applied to future returns).
 Voltas currently trades at 11X 12-month forward earnings, which is in line with the declining growth and
returns profile that we expect for the company.
Key risks
 Upside: Pick-up in order inflows in the Middle East, with Voltas securing potential large-sized orders.
 Downside: Lower volumes in the UCP segment.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

BGR Energy (BGRE.BO, Neutral) Slow order book growth ::Goldman Sachs,

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BGR Energy (BGRE.BO, Neutral)
Slow order book growth in a tough macroeconomic environment; low growth visibility
 Low order book coverage of 2.0X is the main concern: New order flows have been slow for the past few
quarters and any new orders are likely to take at least a couple of quarters before they start to have an impact
on revenues, thereby restricting potential earnings upgrades for this year.
 An uncertain environment in terms of project approvals: Issues such as environmental clearance and
regulatory approvals now take much longer to secure then they did before. This, in our view, has increased
the lag time for placing capital equipment orders by industry participants, which has had a much greater
impact on smaller companies such as BGR.
 The risk to earnings from interest rates is modest, in our view, as the company’s net-debt/equity ratio is only
0.24X and has 4X Interest/EBITDA coverage for FY12E. We have assumed EBITDA margin contraction of 60bp
for FY12E-FY13E.
 We do not make any changes to our estimates on the company as we continue to build in Rs60bn worth of
order inflows for the company this year. This premise is largely contingent on the company successfully
negotiating an equipment order worth about Rs50bn with Rajasthan electricity board where discussions are
currently underway.
Catalyst
 (1) Pick-up in industry-wide project finalizations and awards in the power segment in FY12E, (2) order wins
from state-owned electricity boards over the next 2-3 quarters, and (3) continuing strong execution on its
existing portfolio of projects.
Valuation
 We maintain our Neutral rating on BGR because we believe its low order book has already been priced in the
stock. We lower our 12-month target price on the stock to Rs428 (from Rs520) based on a 10X P/E multiple to
our rolled forward average of FY12E-FY13E EPS (vs. 12X previously and at a 35% discount to our target
multiple on BHEL, which we lower to 15X from 17.5X).
 The stock currently trades at a 12-month forward P/E of 12X (vs. its historical median 12-month forward P/E of
12.3X), which is close to a 35% discount on our valuation of BHEL.
Key risks
 Upside: Order inflow pick-up for the EPC division.
 Downside: (1) Substantially increased price-based competition from peers, and (2) volatile commodity
prices, especially for steel.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

Punj Lloyd (PUJL.BO): Upgrade to Neutral from Sell:: Goldman Sachs,

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Punj Lloyd (PUJL.BO): Upgrade to Neutral from Sell
Yet to show sustained operational improvement but historical trough multiples no longer warranted
 Punj Lloyd’s current order book is dominated by long gestation, low-margin infrastructure and construction
orders (38% as of June 2011). This contrasts sharply with the company’s order book 3 years ago when it was
dominated by hydrocarbon orders (a high-margin, fast churn segment in its business).
 Since we added Punj Lloyd to our Sell list on February 21, 2011, the stock has fallen 17% vs. a 10% decline in
the Sensex. Over the past 12-months Punj Lloyd has declined 46% vs. the Sensex which is down 8%. We
mainly attribute the stock’s underperformance to continued weakness in its operating margins and concerns
over Simon Carves (its UK subsidiary) and its Libyan operations.
 16% of the company’s order book is in Libya, which we remove from our order book estimates as visibility on
any restart of work remains low.
 The last two quarters have resulted in a marginal turnaround with revenue growth close to 30% yoy and
EBITDA margins close to 7% – sustaining this level of performance could lead to a rerating of the stock from
its current low level.
 What prevents us from being more positive on the stock is: (1) Continuous auditor qualification on debtors
for certain projects and (2) any potential liability/write-off coming from its UK subsidiary, which is currently
being liquidated.
Catalyst
 (1) Further delay in execution on slow moving infrastructure orders in Africa; (2) slower-than-expected pick
up in order inflows from the Middle East, and (3) further increase in debt levels to fund working capital
requirements over the medium term.
Valuation
 We upgrade Punj Lloyd to Neutral from Sell as the stock is trading on trough multiples despite showing signs
of revival over the past two quarters. At the same time we raise our 12-month P/B-based target price on the
company to Rs65 (from Rs57) on a 0.7X P/B multiple to the average of FY12E-FY13E book value (increasing
from 0.6X earlier, due to improving ROEs on a PB-ROE framework).
 We lower our FY12-FY14 EPS estimates by 19%-31% on the back of write-offs at its UK subsidiary and higher
interest expense for the next 2 years.
 The stock currently trades as 0.6X FY12E P/B, which is near its historical trough multiple.
Key risks
 Upside: (1) Faster-than-expected execution and collections, and (2) expansion in auditor qualifications.
 Downside: Delay in execution ramp-up.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

Hindustan Construction (HCNS.BO, Neutral) Core business shows no sign of recovering::Goldman Sachs,

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Hindustan Construction (HCNS.BO, Neutral)
Core business shows no sign of recovering while the Lavasa overhang continues – high debt is our
main reason for concern; we maintain our Neutral rating on Hindustan Construction (HCC)
 Despite having specialized knowledge and exposure to Hydro (40% of its order book), Nuclear power (16% of
its order book), and to complex infrastructure projects, order inflow over the past 12 months is a revenue
growth concern. Order inflow for FY11 was Rs33bn (vs. Rs57bn for FY10, and Rs89bn for FY09). We forecast
revenue to grow at a CAGR of 10% over FY11-FY13, on the back of the past 12 months’ order inflow.
 Working capital management concerns (290 days for FY11) for its core business together with high leverage
(5.4X for FY11 – consolidated) continue to exert pressure on HCC’s profitability and cash flow generation.
 Obtaining environmental clearance on Lavasa (65% stake) remains an overhang. The project is awaiting
clearance from the environment ministry (MOEF) and is accumulating a potential loss of up to Rs2cr per day
while construction lays idle – the stock has corrected 50% since the MOEF raised concerns over the
environment impact of the project.
Catalyst
 The company has been making an effort to settle disputes relating to past projects totaling about Rs7.5bn
where claims have been made and are being contested. Any monies recovered will help improve the
company’s working capital situation.
 Any positive news on Lavasa on the commencement of work and obtaining environmental clearance will be
instrumental in supporting the company’s balance sheet.
Valuation
 We lower our 12-month SOTP-based target price on HCC to Rs34 (from Rs40) as we now value the
construction business at 6X EV/EBITDA to the average of FY12E-FY13E EBITDA (down from 10X P/E earlier, in
line with construction sector peers, which now trade at lower multiples).
 We revise down our FY12-FY14 EPS estimates by 8% on the back of higher debt and consequently higher
interest costs.
 HCC trades on FY12E P/B of 1.1X (parent basis) vs. a 5-year historical median of 2.5X.
Key risks
 Upside: Strong order inflows translating to higher billings and improved working capital management.
 Downside: Increase in commodity and construction material prices.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

IVRCL Infrastructure & Projects (IVRC.BO, Neutral) Structurally weak :Goldman Sachs,

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IVRCL Infrastructure & Projects (IVRC.BO, Neutral)
Structurally weak but priced on historical lows – could provide mean reversion opportunity if market
valuations expand; maintain Neutral
 Even though the company maintains a large order book of Rs215bn (3.2X FY11 sales), it has not been able to
raise its execution rate for the following reasons: customer delays, a lack of equity, and land acquisition.
 This low execution rate (31% for last year, which we forecast to drop to 30% for this year) has been
compounded by higher commodity prices and higher interest rates. Combined, these factors put substantial
pressure on the company’s margins and working capital.
 We expect the company’s operating margins to compress by 80bp in FY12 driven by this loss of operating
leverage and the impact of high raw material prices – margins for 1QFY12 compressed by 150bp on the back
of continued weakness in execution, and sales growth of just 2% yoy.
 Another concern for the company is its leverage – given its lower margins (discussed above) and existing
FY11 debt-to-equity of 1.3X, any rise in interest rates is a concern for the company. We believe interest
coverage (EBITDA/interest expense) for the company is likely to compress to 1.3X for FY12E.
 Even though the stock has corrected substantially - down 73% ytd - and is now currently trading at trough
valuations, we see limited traction in the company’s operations both in terms of inflows and execution, while
concerns over the company’s debt management remain high.
 We maintain our Neutral rating for the company based on the above factors. At the same time we lower our
FY12-FY14 earnings estimates by 15%-39% as we lower the execution rate further, and adjust for the
subsequent impact on margins and an increase the company’s debt requirement, with subsequently high
interest expense.
Catalyst
 Strong order inflows in both the water and road segments; commissioning of two pending road BOTs; and
improvement in irrigation project execution in Andhra Pradesh.
Valuation
 We lower our 12-month SOTP-based target price on IVRCL to Rs49 (from Rs93), given that: (1) We value the
company’s construction business at 6X FY12E EV/EBITDA to the average of FY12E-FY13E EBITDA (down from
7X earlier, which is in line with the median for construction sector peers). (2) We apply a 20% holding
company discount to the value of IVRCL’s 80% stake in IVR Prime and 55% stake in HDO.
 IVRCL currently trades at 8.5X FY12E P/E and 0.3X FY12E P/B vs. a median of 18X and 1.7X, respectively.
Key risks
 Upside: (1) Faster execution on new projects, (2) improved collection of receivables from Andhra Pradesh
irrigation projects, which helps working capital management.
 Downside: (1) Aggressive bidding for new projects, (2) steep rise in interest rates, rise in material and
financing costs, and (3) lower-than-expected spending by the government on core infrastructure projects.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

Bharat Heavy Electricals Ltd (BHEL.BO: Downgrade to Neutral from Buy)::Goldman Sachs,

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Bharat Heavy Electricals Ltd (BHEL.BO: Downgrade to Neutral from Buy)
Weakness in new orders from power industry to limit upside despite healthy order book coverage
 We downgrade Bharat Heavy Electricals (BHEL) from Buy to Neutral on the back of order weakness in its core
power segment and relative outperformance of its peers since our upgrade in early May.
 Since we added BHEL to our Buy list on May 3, 2011, the stock has fallen 12.3% vs. a 10% decline in the
Sensex and a 20% drop in our sector coverage. Over the past 12-months BHEL has declined 28% vs. the
Sensex which is down 8%. We mainly attribute the stock’s outperformance to its continued execution
delivery, a large order book that provides revenue visibility, and reasonable valuations.
 Although the company has a strong order book with greater than 3X coverage, the momentum of inflows for
the company has remained weak over the past few years – limiting the company’s medium-term growth
prospects.
 Weak macroeconomic conditions and a lack of new orders, as observed in the power generation industry,
limit the upside to BHEL’s numbers, in our view.
 Increasing competition has resulted in margin pressure for BHEL, which remains a concern as more
production capacity comes on stream and order inflow is weak for newer supercritical equipment orders.
 Meanwhile other power equipment companies in our coverage universe (L&T, Thermax, and BGR) have also
corrected and underperformed BHEL recently (by 11% since we upgraded the stock to Buy) – we believe the
opportunity for such relative outperformance is now limited.
 We lower our FY12-FY14 EPS estimates by 0%-4% given that we now factor in slightly higher raw material
prices.
Valuation
 BHEL currently trades at a 12-month forward P/E of 12.5X FY12E P/E and 3.3X FY12E P/B (vs. a 5-year mean
12-month forward P/E and P/B of 22.1X and 5.7X, respectively), at 5-year trough valuations. This discount to
historical valuations adequately prices in the risks from increasing competition, in our view.
 We lower our 12-month target price on BHEL to Rs2,081 (from Rs2,365), based on a P/E multiple of 15X the
average of our new FY12-FY13 EPS estimates. Our P/E target multiple (down from 17.5X earlier) is at a 20%
discount to its historical median, which is in line with the 20% return compression we estimate over FY12-
FY14.
Key risks
 Upside: (1) Uptick in award activity in the power space, and (2) any potential entry restriction to foreign
competition.
 Downside: (1) Substantially increased priced-based competition from peers, and (2) volatile commodity
prices, especially steel.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

GVK Power & Infrastructure (GVKP.BO, Neutral) Aggressive bidding ::Goldman Sachs,

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GVK Power & Infrastructure (GVKP.BO, Neutral)
Aggressive bidding and capital raising may provide new growth opportunities but changes in policy
plus execution risks are high. We maintain our Neutral rating on the stock despite below book
valuation as we are not convinced by the company’s strategy to focus more on growth than returns
 Exposure to core infrastructure sectors such as power generation (901 MW operational, 870 MW under
construction, and 2,661 MW under development), airports (37% stake in Mumbai Airport (MIAL), 29% in
Bangalore Airport (BIAL)) – are likely to increase post recent announced transactions (BIAL stake hike and
Hancock coal mine acquisition) – and roads (90km BOT operational).
 While both the aero and non-aero revenues at the Mumbai and Bangalore airports continue to grow, current
high finance charges and outstanding policy uncertainty reduces our valuations on these assets. Our
valuation is at a substantial discount to recent transactions undertaken by the company as it tries to increase
its stakes in these assets (50% for Mumbai Airport, 60% for Bangalore Airport).
 GVK Power has various regulatory uncertainties surrounding the company in relation to: Airports: MIAL –
treatment of land valuation and BIAL – revenue till structure (separation of aero and non-aero revenues);
Power: The regular availability of gas at a profitable price, the possibility of merchant power sales from
current production, and the company’s ambitious plan to expand further into coal assets (e.g. Reuters
reported on August 26, 2011, bids by the company for two coal mines of Hancock Prospecting, Australia).
Catalyst
 Any clarity on the tilling mechanism for BIAL or how the value of the company’s real estate is treated by the
regulator, AERA.
 A large part of the value of GVK Power’s airport assets comes through real estate monetization, which has
been delayed. Approvals from the local development authority (MMRDA) – any monetization clearance over
2H FY12 could be a catalyst.
Valuation
 At 0.8X FY12E P/B (vs. a 5-year median P/B of 1.9X), GVK Power’s valuations seem reasonable. However, this
is counter balanced to some extent by uncertainty on the regulatory front and high leverage on the
company’s consolidated balance sheet.
 We lower our FY12-FY14 EPS estimates by 4%-7% as we incorporate the impact of higher interest expenses
and lower plant load factors (PLFs) on energy business due to an interrupted gas supply in Andhra Pradesh.
 We maintain our Neutral rating and 12-month SOTP-based target price of Rs23 on GVK Power as we roll
forward our estimates by 6 months to the average of FY12E-FY13E.
Key risks
 Upside: (1) Monetization of Mumbai airport land and (2) more road project wins.
 Downside: (1) Prolonged weakness in traffic, (2) further delay in monetization of Mumbai airport real estate,
and (3) inclusion of real estate sales in calculating regulated airport capex by AERA.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

GMR Infrastructure (GMRI.BO, Neutral) Diverse infrastructure asset portfolio – Goldman Sachs,

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GMR Infrastructure (GMRI.BO, Neutral)
Diverse infrastructure asset portfolio – valuations are beginning to look fair but most projects are still
not free cash flow generating, and concerns remain over aggressive bidding and changes in policy
 Attractive exposure to high growth areas such as airports (stakes in Hyderabad, Delhi, and Istanbul airports),
power generation (823 MW operational, rising to 3813 MW by 2013), roads (255km annuity and 166km toll
roads), and special economic zones (3,300 acres).
 Substantial value of airport assets to come through real estate development (1,750 acres). However, the nearterm
benefits of this may be low and the regulatory overhang on the treatment of real estate remains.
 The power assets currently under construction & development (2,990 MW) would also start contributing
value only in FY13. The company’s plant in Andhra Pradesh will continue to struggle for lack of uninterrupted
gas supply.
 Ytd, the stock has underperformed the Sensex by 20% but outperformed GVK Power by 19% due to: (1) its
longer gestation projects still needing incremental capital, (2) concerns over higher interest rates and the
company’s leverage, and (3) policy decisions still pending from airport regulator.
Catalyst
 Timely execution on projects, especially in the power segment over the next 12 months.
 Delay in real estate development at airport assets and inclusion of real estate sales in calculating regulated
airport capex by the airport regulator (AERA).
Valuation
 We maintain our Neutral rating on the stock as we believe that value in GMR Infrastructure’s asset base will
have to be balanced with fewer assets being operational at any one time.
 We change our FY12/FY13/FY14 EPS estimates by -118%/-25%/14% to reflect higher interest expenses than
earlier forecasted and higher depreciation on the New Delhi Airport Terminal (DIAL).
 Based on the above-mentioned factors we lower our 12-month SOTP-based target price to Rs37 (from Rs45)
in addition to rolling forward our target price by 6 months to the average of FY12E-FY13E.
Key risks
 Upside: (1) Monetization of real estate, and (2) any favorable airport regulation from AERA and approval of
capital expenditure.
 Downside: (1) Prolonged weakness in traffic, (2) delay in power plant commissioning, and (3) an inability to
raise finances when required.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

Jaiprakash Associates (JAIA.BO, Neutral) Managing debt will be difficult::Goldman Sachs,

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Jaiprakash Associates (JAIA.BO, Neutral)
Managing debt will be difficult if new project execution remains slow; we maintain our Neutral rating
on Jaiprakash Associates (JPA) given the risks despite substantial stock price correction
Exposure to growth areas of infrastructure and strong line up of new projects gives good visibility on future sales:
 Power: About 4,000 MW to be added by the end of FY13; 700 MW currently operational; Karcham Wangtoo
(1,000 MW) started first unit in May 2011.
 Cement: 26.2 MT operational, a further 9.7 MT planned for FY12.
 Roads & Real Estate: 165km BOT to become operational by early 2012, adjoining real estate of about 500mn
sq. ft. under development (expected to be sold over the next 18 years).
 JPA’s sports city (Rs1,400cr project) opening and hosting F1 race in October 2011.
However, high leverage has been a concern especially in a rising interest rate scenario:
 Construction work has been delayed for the company’s thermal power plant projects due to local land
acquisition issues – if the commissioning of these projects gets delayed, it would put further pressure on its
balance sheet as the interest on outstanding debt on these projects would continue to get capitalized.
 We remain concerned about the already high leverage which seems excessive even when we factor in the
scale of these new projects being planned across various business segments.
Valuation
 We maintain our Neutral rating on JPA but lower our EPS estimates by 26%-28% on the back of lower E&C
segment revenue (predicated on project work delays as discussed above) and a higher interest expense
outflow. We also lower our 12-month SOTP-based target price to Rs67 (from Rs106) based on: (1) Rolling
forward our multiple estimates to the average of FY12E-FY13E. (2) Reducing EV/EBITDA multiple on the E&C
business to 6X from 8X – in line with the target multiple for other construction sector peers. (3) Adjusting the
value on JP Power Ventures based on current market price and valuing JP Infratech based on a 20% discount
to NAV. (4) Incorporating higher debt on the base business, as reported by the company in its full-year
consolidated results for FY11.
 JPA trades at 16.5X FY12E P/E and 1.3X P/B vs. its historical 5-year median of 19.5X and 2.9X.
Key risks
 Upside: (1) Improved realizations on cement, and (2) faster execution in power and real estate projects.
 Downside: (1) Difficulty in fund raising for planned future projects, and (2) volatile raw material prices.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

Container Corporation of India (CCRI.BO, Sell) Growth and returns declining –Goldman Sachs,

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Container Corporation of India (CCRI.BO, Sell)
Growth and returns declining – valuations still not attractive; maintain Sell
 We reiterate our Sell rating on Container Corporation (Concor) due to:
(1) The domestic segment becoming increasingly unattractive due to slower growth and shorter lead
distances.
(2) Intense competition in the Exports-Imports (EXIM) segment, leading to pressure on Concor’s market share
as well as lower price realizations.
(3) Declining margins: We forecast 140bp decline in EBIT margins over FY11-FY12 as we believe it will be
difficult for the company to fully pass on increases in haulage charges and rising fuel costs to customers.
(4) Unattractive valuations: Current 12-month forward P/E is near its 7-year mean, despite FY12E EPS growth
of 6% – lower than FY04-FY11 EPS CAGR of 12%.
 We do not make any changes to our estimates on Concor – our current forecasts are already 5%-6% below
Bloomberg consensus expectations for FY12 and FY13.
Valuation
 Concor currently trades at a 12-month forward P/E of 16.5X – a 13% discount to its 5-year average 12-month
forward P/E of 19X. Concor’s current valuation adequately balances the company’s strong execution track
record for the company with the near-term risks from order inflow delays, in our view.
 We lower our 12-month target price to Rs1,012 (from Rs1,030) based on 14X average FY12E-FY13E EPS (vs.
15X earlier), which is in line with the 5-year median 12-month forward P/E for the company, and our
expectations for a slower growth outlook in the future.
 Although the stock has declined 16% since we added it to our Sell list, and our revised target price now
implies 10% upside potential, Concor still offers one of the lowest upsides in our coverage group and hence
we maintain our Sell rating on the stock.
Key upside risks
 (1) Policy changes to increase the attractiveness of rail freight vs. road freight, and (2) sudden pick-up in
industrial production growth and manufacturing.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

Thermax (THMX.BO, Sell) Visibility on order book is a key concern – lGoldman Sachs,

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Thermax (THMX.BO, Sell)
Visibility on order book is a key concern – lower growth and current premium over Bharat Heavy
Electricals (BHEL) could lead to underperformance
 We reiterate our Sell rating on Thermax based on its weak order book and premium valuations. We lower our
12-month P/E-based target price to Rs504 (from Rs567) based on 13.5X P/E on average FY12E-FY13E EPS
(down from 15.7X earlier as we maintain a 10% discount to our target multiple on BHEL, which we lower to
15X from 17.5X). We make no change to our EPS estimates.
 Strong pick-up in order inflows in FY10 and 1QFY11, driven by an improvement in industrial capex, helped
improve the company’s revenue visibility. Reflecting this, the stock price rose 42% through CY2010, vs. a 17%
rise in the BSE Sensex.
 However, the lack of big-ticket order wins and industry-wide delay in the finalization of key orders in the
power segment over the past two quarters has led to a 43% decline in the stock price vs. a 21% decline in the
BSE Sensex in 2011 ytd.
 This slow order inflow over the past few quarters (a yoy decline for the past 4 quarters) has resulted in low
order book coverage (1.1X FY12E, the lowest in our coverage universe) reducing revenue growth visibility for
the next 12-18 months.
 The less-than-1-year execution cycle on smaller orders in Thermax’s base business implies that it is critical
for the company to maintain a strong order inflow trend in order to ensure revenue visibility.
 Structural concerns surrounding increasing competition for large-size EPC orders together with the near-term
risk of rising interest rates could delay industrial capex investment, a key growth driver for Thermax.
Valuation
 Thermax currently trades at a 12-month forward P/E of 13.3X – a 37% discount to its 5-year average 12-month
forward P/E of 21X. Themax’s current valuation adequately balances the company’s strong execution track
record with the near-term risks from order inflow delays, in our view.
Key upside risks
 (1) Improvement in IPP order inflows, leading to stronger-than-expected order inflows, and (2) stronger
tractions in the environment segment leading to better margins

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

Cummins India (CUMM.BO): Downgrade to Sell :Goldman Sachs,

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Cummins India (CUMM.BO): Downgrade to Sell from Neutral
Attractive long-term exposure to industrial growth but current risk-reward unfavorable – expensive
valuations with developed market exposure to result in underperformance
 We downgrade Cummins to Sell from Neutral on relatively expensive valuations and the company’s relative
over dependence on exports (27% of sales in FY11).
 We believe in the long run Cummins is well positioned to benefit from continuing power back-up demand
(generator business) and capex recovery (engines for equipment used in transportation, construction, and
infrastructure activities).
 That said, current domestic weakness in industrial capex (especially in relation to mining and construction)
combined with a slowdown in economic growth in developed markets (primarily the US), is having a twofold
negative impact on the company’s medium-term growth, in our view.
 This slower growth, along with the large capex requirements for this and next year, is likely to impact the
company’s capital returns substantially, in our view – we forecast 700bp compression in ROE over the next 2
years.
 EBIT Margins for the company improved by 530bp over FY08-FY11, driven by capacity expansion and cost
efficiency improvements (lower percentage of imported components).
 We reduce our already below consensus EBIT margin forecasts for FY12-FY14 by a further 50bp-
100bp as we factor in a further loss in operating leverage for the company and factor in the impact of a
further increase in the cost of its key raw material, pig iron. We lower our EPS estimates for FY12-FY14 by
15%-22% as a result of the above changes.
 The company’s capacity expansion plan if on track (Rs4bn-Rs4.5bn per annum for the next 2-3 years, vs.
Rs1bn planned earlier) indicates its belief in the long-term demand prospects of its products and services.
Valuation
 Cummins currently trades at a 12-month forward P/E of 18X, a 10% premium to its 5-year average 12-month
forward P/E of 16.5X. These valuations are unjustified in our view – not pricing in fully the slowing demand
outlook for the company’s products and the reducing capital returns over the next 12-24 months.
 We lower our 12-month target price to Rs518 (from Rs757, which implies 15% downside potential) based on
15X P/E on average FY12E and FY13E EPS (down from 18X given slower growth over the next 2 years) – 10%
below its 5-year median 12-month forward P/E, which is justified in our view given the slower growth for the
company over next two years.
Key upside risks
 (1) Stronger-than-expected pick-up in domestic industrial and construction growth, and (2) improvement in
US economy increasing demand for its export products.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

NCC Limited (NCCL.BO, Buy) Close to trough valuations ::Goldman Sachs,

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NCC Limited (NCCL.BO, Buy)
Close to trough valuations compensate for structural weakness – potential for substantial mean
reversion when the order inflow and rate cycle reverses
 We continue to highlight NCC Limited (NCC) as our top-pick within the mid-cap construction space for its: (1)
relatively attractive valuation (68% discount to its historical P/B); (2) better visibility than its peers on nearterm
growth prospects, and (3) relatively strong balance sheet, with a lower equity requirement relative to its
peers (lowest proportion of captive projects in order book). We reiterate our Buy rating on NCC.
 The company’s diverse order book makes it relatively safe to execute on problems on region and segmentspecific
issues (35% of its order book is in buildings and housing spread between 8 segments and 15% of its
order book is in its international division).
 Although order inflows have been weak recently – FY11 inflow declined 23% and 1Q FY12 declined 33% – the
company’s previous track record of growing faster than the industry during 2005-2008 supports our mean
reversion argument for the stock.
 Equity requirement over FY12E in the current BOT projects under construction of Rs2.75bn could be funded
through internal accruals, in our view. However, we think equity requirement to fund the Nelcast Power Plant
may require the need to raise additional capital (largely debt, though, in our view).
Catalyst
 Start of toll collection on the new road projects over the next quarter will be key as these projects start to
contribute to revenue.
 Financial closure for the Nelcast Power Plant will strengthen the company’s ability to tie up funds and
execute this large-scale project.
Valuation
 Post the 62% decline in NCC’s stock price ytd, we believe the risk-reward for the stock is attractive. We
believe the recent decline in the company’s stock price is unjustified and more than factors in
concerns over regular equity dilution and its potential to improve capital efficiency.
 We lower our 12-month SOTP-based target price to Rs76 (from Rs118), as we value the domestic construction
business on 6X average FY12E and FY13E EV/EBITDA (from 10X P/E earlier, in line with our target multiple for
construction peers), international business on 7X average FY12E and FY13E EPS (from 10X earlier, reducing
growth prospects and higher risk due to fixed cost contracts), and we continue to value BOT projects at cost
of equity of 15%.
 NCC is trading at 7.6X 12-month forward P/E (parent basis), a 40% discount to its historical median. We lower
our FY12-FY14 EPS estimates by 10%-22% based on slower-than-earlier assumed order inflows and slightly
higher interest expenses.
Key downside risks
 (1) Commodity and raw material price increases, (2) higher tax provisions, and (3) capex weakness.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

IL&FS Transportation (ILFT.BO, Buy) Differentiated business model ::Goldman Sachs,

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IL&FS Transportation (ILFT.BO, Buy)
Differentiated business model protects the company from the competition – attractive valuations
 Driven by a robust order book of Rs94.4bn, we expect the company’s differentiated business model to be
able to generate value at the pre-construction phase of a road project to drive 35% sales CAGR over FY11-
FY13E. We reiterate our Buy rating on IL&FS Transportation (ILFT).
 Strong track-record with state government agencies and geographical spread of current portfolio positions it
well to benefit from the Rs1tn worth of state road projects, in our view.
 ILFT’s current project portfolio comprises a good mix of annuity (54%) and toll projects (46%) thus making
cash management more efficient leading to better risk management.
 Given its strong cash generating ability, we think ILFT would be able to fund the equity requirement of
Rs10bn for its current portfolio of projects over FY12E and FY13E through internal accruals (excluding
Kazakhstan, Chhattisgarh, and Jharkhand Phase II projects).
 Although competition for National Highway Road projects has continued to increase over the past 12
months, ILFT can focus more on its niche market of state highways and district roads – providing adequate
business opportunities while also preserving capital returns and IRRs.
 We raise our EPS estimates on ILFT for FY12-FY14 by 0%-18% as we build in lower interest expense from
capitalized interest.
Catalyst
 Achieving better finance rates and structures for upcoming projects would strengthen the company’s ability
to manage and fund multiple projects, in our view.
 Continued fast pace of project awards from NHAI.
Valuation
 The stock currently trades at FY12E P/E of 7X. We lower our 12-month SOTP-based target price on ILFT to
Rs260 (from Rs277) as we roll forward by 6 months and reduce our value for the services segments (from
5.5X EV/EBITDA earlier to 5X now, maintaining a 15% discount to construction sector peers).
 The stock currently trades close to our ex-growth implied valuation of Rs189, thereby limiting the potential
variance from these levels.
Key downside risks
 (1) Increase in interest rates, given high financial leverage, (2) heavy dependence on third-party contractors
for project execution, (3) delayed integration of Elsamex, and (4) delay in contract awards.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

Sintex Industries (SNTX.BO, Buy, add to Conviction List) Strong execution continues –Goldman Sachs,

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Sintex Industries (SNTX.BO, Buy, add to Conviction List)
Strong execution continues – attractive valuations and cash returns; risk of non-core investments
low
 We reiterate our Buy rating on Sintex, and add it to our Conviction Buy List, as the company has continued to
deliver good execution (+20% revenue growth for the past 6 consecutive quarters) and is trading at attractive
valuations, in our view.
 Despite higher raw material costs over the past few quarters, better cost management and improved utilization
at overseas custom molding subsidiaries, helped deliver a 200bp improvement in EBITDA margins in FY11.
 Capex investments made by the company over the past three years (about $350mn) should continue to drive
faster sales growth and improvement in margins through operational leverage, in our view.
 We see the company’s exposure to the EU/US through its foreign custom molding subsidiaries as the
primary risk to our forecasts – 24% of sales and 18% of EBITDA for this year.
 We build in 8% growth for Sintex’s foreign businesses this year vs. company guidance of 12%-13%. We also
build in a reduction in margins in the segment by 150bp vs. the company’s expectations of flat segmental
margins on the back of slower growth.
 Sintex has made announcements to undertake investments in the power generation sector. Although this
investment would be non-core in nature, the company intends to build this capacity largely for internal
consumption. We see this as a concern but see limited impact on valuations given the relatively modest size
of such planned investments.
Catalyst
 (1) New order wins and continued execution in its monolithic business; (2) India’s continued spend on social
infrastructure – especially through increased allocation in the upcoming budget; (3) stronger-than-expected
recovery in growth and margins of overseas custom molding subsidiaries in FY12E.
Valuation
 We lower our 12-month target price on Sintex to Rs225 (from Rs236) as we roll it forward by 6-months to an
average of 10X average FY12E and FY13E EPS (vs. 11X earlier), which is in line with its historical median P/E
multiple and now implies 56% upside potential. We lower our FY12-FY14 EPS estimates on Sintex by 3%-4%
on the back of slower growth.
 The stock currently trades at a 12-month forward P/E of 6.5X, at a 39% discount to its 5-year median and at a 35%
discount to MSCI India, implying attractive valuations.
Key downside risks
 (1) Prolonged slowdown in telecom infrastructure and international auto business segments, (2) execution
delays in its monolithic segment, and (3) volatile raw material prices

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

Larsen & Toubro (LART.BO, Buy) Most resilient in a tough macroeconomic environment –Goldman Sachs,

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Larsen & Toubro (LART.BO, Buy)
Most resilient in a tough macroeconomic environment – robust order book growth while maintaining
capital returns
 We reiterate our Buy rating on L&T and raise our 12-month target price to Rs2,013 (from Rs1,953), as we roll
forward our SOTP-based methodology by 6 months to the average of FY12E-FY13E, reduce our target
multiple for L&T’s E&C business to 20X (vs. 21X earlier), and value L&T finance at listed value.
 We lower our expectations of order inflow for the company this year to 8% from 15% earlier. Despite the
significant slowdown being observed for other companies in the construction space, we believe L&T holds an
advantage in that it is able to continue to gain market share in both domestic process and infrastructure
segments and at the same time supplement this through increased orders from the oil and gas segment in
the Middle East.
 Although we don’t expect a recovery in order inflow for the broader capital goods sector for the next few
quarters, we are positive on L&T due to its strong order book, deeper product range and service offerings,
and broader geographical reach.
 We upgraded our rating on L&T to Buy in February 2011, as we believe three key elements would drive
outperformance for its stock, namely: (1) stabilization in execution cycle for the company (at 31-32
months in FY12E, increasing from 28 months in 2009 to 31 months in FY11), (2) improving returns over
the next 2 years (as investments become operational), and (3) attractive current valuations – 12%
discount to its historical median on P/E (down 23% ytd. vs. the Sensex, which is down 21%).
 L&T’s current restructuring could also be a key medium-term catalyst for stocks to unlock value from
investments made in earlier years, especially into L&T IDPL, as many such subsidiaries come up for potential
listing (as announced by the company) – (please refer to our previous report for details: L&T – restructuring in
progress: what are the implications?; part 1, published March 13, 2011).
Catalyst
 (1) New order wins, especially in the power and industrials segments, over the near term.
(2) Compression in the execution cycle.
Valuation
 Current valuations appear reasonable – with the stock currently trading at a 12-month forward P/E of 19X
(long-term median of 21.5X) and 12-month forward P/B of 3.2X (long-term median of 4.3X), and continuing to
generate ROE of 17%-18% through FY13E. We lower our FY12-FY14 EPS estimates on L&T by 2%-5% on the
back of higher interest expenses incurred by the company as a result of its higher debt levels.
 In our view, L&T’s significant exposure to India’s industrial and infrastructure capex makes the stock appealing
from a long-term perspective, while also having a robust ability to deal with the current slowdown in contract
awarding activity, and high commodity and interest rates.
Key downside risks
 (1) Aggressive bidding and (2) a delay in the government awarding infrastructure contracts.

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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

IRB Infrastructure (IRBI.BO, Buy, add to Conviction List) :: Goldman Sachs,

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IRB Infrastructure (IRBI.BO, Buy, add to Conviction List)
Stock close to ex-growth valuations, attractive risk-reward, and limited interest rate risk
 We reiterate our Buy rating on IRB, and add it to our Conviction Buy List, given the company’s continued
strength in cash generation with limited direct risk to the global macroeconomic environment, solid hedge to
domestic interest rates (through WPI-linked toll rates), and attractive price.
 We prefer the road segment within all the infrastructure segments due to a stable policy regime, transparent
bid mechanism, and long-term linkage of the sector’s growth to India’s GDP.
 We expect IRB to register a strong sales CAGR of 27% between FY11-FY13E through a combination of higher
toll and traffic increases plus on-schedule execution of 4 of its under construction projects.
 The National Highways Authority has markedly improved awarding of national highways since last year
(4,000km awarded over the past year vs. an average of 1,600km per year over the previous 3-4 years). We see
a strong pipeline of awards developing (about 15,000km over the next 20 months, valued at US$27bn.
 This improved ordering and the lack of orders in the general construction space has attracted many new
names to the roads sector, increasing the risk of lower IRRs on incremental project wins. However, for IRB,
given its cost advantages over other construction companies, we factor a lower risk of IRR dilution (please
see our report: Higher construction segment margins sustainable; reiterate Buy, published June 19, 2011).
 We estimate that IRB would be able to fund the equity requirement of Rs17bn for its current portfolio of
projects through internal accruals, in our view, given its strong cash generation ability (21% CAGR for cash
flow from operations over FY11-FY13E).
 The recent price correction in the stock ensures a good risk-reward, in our view, with the stock trading close
to our ex-growth valuation (no future projects/no value for construction past current order book) of Rs154.
Catalyst
 (1) New project wins over the next 6-12 months, (2) strong traffic growth at key operational projects leading
to better realizations from toll roads, and (3) strong pick-up in execution in 3Q and 4QFY12E leading to onschedule
execution of the projects currently under construction.
Valuation
 12-month forward P/E of 8.5X and P/B of 1.5X – a discount of 48% and 44% to its historical median – while
still generating ROEs of 19% for the next two years, which is in line with its trading history. We lower our 12-
month SOTP-based target price to Rs200 (from Rs221) as we remove the value of the Karnataka-Goa project
(currently awaiting environmental clearance) and roll forward our target price by 6 months on the back of our
revised FY12-FY14 EPS estimates (changing by -2% to +32% to include Ahmedabad project win in estimates).
Key downside risks
 (1) Aggressive bidding impacting profitability, (2) higher interest rates, (3) slower awarding of road contracts,
and (4) delay in bringing road segments under tolling.


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Goldman Sachs:: Slowdown in capex continues: Sector at trough valuations

Union Bank of India- Consistently has disappointed ::Macquarie Research,

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Union Bank of India
Consistently has disappointed
Event
 Downgrading to Neutral: We cut our earnings estimates and TP sharply and
downgrade Union Bank to Neutral from Outperform. Our TP is now Rs260.
Impact
 Consistently has disappointed on asset quality: Union Bank has
disappointed time and again on asset quality, with slippages being much
higher than expected. We don’t think slippages are going to abate over the
long term. There could be lower slippages in 2H FY12; however, we think
FY13 numbers are going to look bad too. We estimate that stressed assets
will increase from 58% of net-worth in FY11 to 100% by FY13. We factor in a
25bps YoY increase in credit costs to 95bps in FY13E.
 Management change in April 2012: The current CMD, Mr. Nair, is expected
to superannuate/retire in April 2012. Management changes in PSU banks
have caused a lot of uncertainty, as reflected by past experiences.
 Deposit franchise remains weak: Despite all the aggressive re-branding
and investments in technology, Union Bank’s CASA has remained weak at
30-31% levels and has failed to show any improvement over the past few
years.
 Fee income momentum disappointing: Fees as a proportion of assets have
been consistently declining from 28bps in FY04 to 17bps in FY11. What
surprises us is that, despite having heavily invested in technology, re-branding
and infrastructure/systems, Union Bank has failed to deliver on the noninterest
income front.
 Will take management guidance with a pinch of salt: We recommend that
investors not get carried away with management guidance in general, as it
has consistently disappointed, and management has shown a tendency to
revise guidance mostly downward every quarter.
Earnings and target price revision
 We cut our earnings by 17% for FY13E and by 21% for FY14E, mainly due to
higher credit costs. We cut our TP by 38% to Rs260 mainly as a result of
reducing our target multiple from 1.4x to 0.9x. The reduction is due to a lower
ROE and lower projected earnings growth.
Price catalyst
 12-month price target: Rs260.00 based on a Gordon Growth methodology.
 Catalyst: Pressure on asset quality – increase in NPLs and restructured
assets.
Action and recommendation
 Downgrade to Neutral: We downgrade Union Bank to Neutral with a revised
TP of Rs260.

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India banks- Gloom, doom, kaboom!:: Macquarie Research,

State Bank of India - Big is no longer better ::Macquarie Research,

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State Bank of India
Big is no longer better
Event
 Downgrade to Underperform with TP of Rs1,700; doesn’t deserve
premium valuations: We downgrade State Bank of India (SBI) to
Underperform from Neutral and cut EPS for the parent sharply, by 16% for
FY13E and 25%for FY14E, driven by higher credit costs and opex. We do not
expect asset quality pains to abate, and pensions should also be a recurring
bane for SBI. We cut our TP by 30% to Rs1,700 on account of sharply
reducing our TP multiple due to lower ROE and earnings growth.
Impact
 Asset quality – the biggest thorn in the bush: SBI’s 1Q12 slippages, at 3%
of advances, was surprising to us, to say the least. We highlight that SBI is
reporting such slippages at a time when the power sector and other
infrastructure sectors are yet to show NPLs. The full impact of elevated rates
on the SME sector is yet to be felt. We now expect a sharp pick-up in NPLs as
well as restructured assets booked and expect stressed assets as a
percentage of net worth to increase from 70% in FY11 to 93% FY13E.
 Woefully inadequate capital position: The Tier-1 ratio is at 7.7% – the
lowest amongst large banks – and with the government’s fiscal position in a
precarious state, capital infusion looks to us like a remote possibility in
FY12E. We have seen several instances of the government delaying capital
infusion decisions. In the past, the government’s injected capital in SBI was
significantly delayed (by nearly two years).
 Margin improvement is encouraging – that’s the only saving grace: SBI
continues to have a very strong liabilities franchise, with CASA at 48%, and
has managed to report a very good 1Q NIM of 3.6% – much higher than street
expectations. Management’s guidance of achieving a 3.5% NIM for FY12E
now looks more likely, in our view.
 Structurally inferior return ratios: SBI’s ROA is structurally lower than its
peers by 10–20bp, at around 80-90bp, owing to its higher opex ratio emanating
out of pensions and other employee benefit provisioning. We note that SBI is
the only PSU bank in India from which employees get both defined benefits as
well as defined contribution benefits. Any actuarial revaluation therefore hurts
SBI the most, owing to its large employee base dependent on pensions.
Earnings and target price revision
 We are cutting FY13E and FY14E EPS by 16% and 25%, respectively, on
account of increased credit costs and opex. We are reducing our TP by 30%
to Rs1,700 from Rs2,450 as a result of lowering our target multiple from 1.4x
to 1.05x on lower ROE and earnings growth.
Price catalyst
 12-month price target: Rs1,700.00 based on a Sum of parts methodology.
 Catalyst: Continued increase in slippages, negative surprises on opex.
Action and recommendation
 Premium valuations unwarranted: SBI trades at a ~10% premium to its
large-cap peers despite having inferior return ratios. Downgrade to
Underperform with a TP of Rs1,700.

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India banks- Gloom, doom, kaboom!:: Macquarie Research,