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JSPL and L&T are our top picks due to improving competitiveness
A recent spate of big ticket project approvals, coupled with government initiatives
for follow-on approvals for others, have led to hope that the ongoing cyclical
downturn may not become a structural slowdown. A lot depends on the timelines
for the passage of the mining bill, the auctioning of coal mines, and the land
reform bills for seamless development (akin to that witnessed in the road sector).
Our latest promoter/CFO survey suggests business confidence is improving at the
margin. At current valuations, we prefer industry leaders such as JSPL and L&T.
margin. At current valuations, we prefer industry leaders such as JSPL and L&T.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 146/04/2011.
Industry Update
Top picks
Jindal Steel & Power (JNSP.BO),INR487.75 Buy
Larsen & Toubro Ltd (LART.BO),INR1,265.80 Buy
Coal India Limited (COAL.BO),INR308.80 Buy
Thermax Limited (THMX.BO),INR448.85 Buy
IRB Infrastructure Dev. (IRBI.BO),INR145.45 Buy
Companies featured
Larsen & Toubro Ltd (LART.BO),INR1,265.80 Buy
2011A 2012E 2013E
P/E (x) 25.7 17.0 15.2
EV/EBITDA (x) 16.1 10.7 10.0
Price/book (x) 4.0 2.5 2.2
Coal India Limited (COAL.BO),INR308.80 Buy
2011A 2012E 2013E
P/E (x) 18.6 13.6 12.5
EV/EBITDA (x) 10.2 6.8 5.7
Price/book (x) 6.6 4.5 3.6
Jindal Steel & Power (JNSP.BO),INR487.75 Buy
2011A 2012E 2013E
P/E (x) 16.9 11.0 8.2
EV/EBITDA (x) 12.1 8.8 7.3
Price/book (x) 4.6 2.6 2.0
Siemens India Ltd (SIEM.BO),INR688.40 Hold
2010A 2011E 2012E
P/E (x) 29.7 27.1 20.4
EV/EBITDA (x) 15.6 15.1 10.4
Price/book (x) 8.4 5.8 4.7
IRB Infrastructure Dev. (IRBI.BO),INR145.45 Buy
2011A 2012E 2013E
P/E (x) 18.1 9.3 10.4
EV/EBITDA (x) 10.7 8.1 8.0
Price/book (x) 2.9 1.7 1.5
ABB Ltd India (ABB.BO),INR612.50 Sell
2010A 2011E 2012E
P/E (x) 276.8 44.2 25.4
EV/EBITDA (x) 201.8 26.4 15.6
Price/book (x) 6.9 4.9 4.1
Areva T&D (AREV.BO),INR194.85 Hold
2010A 2011E 2012E
P/E (x) 37.0 20.5 15.3
EV/EBITDA (x) 17.4 10.8 8.3
Price/book (x) 7.7 4.0 3.3
Thermax Limited (THMX.BO),INR448.85 Buy
2011A 2012E 2013E
P/E (x) 23.3 12.9 13.4
EV/EBITDA (x) 14.1 7.3 7.3
Price/book (x) 5.5 3.4 2.9
Competition in roads easing
0%
5%
10%
15%
20%
25%
30%
0
2
4
6
8
10
12
14
16
18
20
April July Aug 1st half Aug 2nd
half
Sep Nov
No.of bidders NPV Difference (RHS)
(No of
bidders)
(% of project
cost)
Global Markets Research Company
Business confidence improving at the margin
Over the last fortnight, the MoEF has given clearances for the Lavasa Project and
ToR for the 2,400MW Tamnar project being built by JSPL so that construction can
start. The government has a list of 12 projects for fast-track clearances. Our quick
survey with business leaders in the infrastructure space, including Jindal Group,
Coal India, L&T, Areva, and many others, suggests that with the exception of
projects stuck due to local political factors, clearances have started coming
through. It appears that project clearance may no longer be the biggest obstacle
for companies.
Hopes pinned on government initiatives to drive structural reforms
Notwithstanding the clearances of projects that have been stuck for more than a
year and doing away with the ‘go/no-go’ criteria for mine clearances, business
leaders are hoping that the land acquisition bill is passed by parliament sooner
rather than later. According to most, the provisions of the bill, if implemented,
would raise project costs by 7-10%, but the process of land acquisition would be
accelerated by more than one to two years. Allocation of coal mines through
bidding is another event to watch out for. While there is still a lack of non-skilled
workers, our survey suggests business leaders are investing in technology to
reduce labor dependence.
Falling rupee value and easing of competition are themes for next six months
The recent sharp fall in the rupee caught almost all companies unawares and
resulted in a scramble for forex cover, accentuating the currency movement.
However, industry leaders have made remarks that competition is easing --
Areva’s CEO notably suggested that there are no longer “suicide bombers” in
bids. Moreover, the data from recent road bids suggest that competition is easing
and companies have raised the hurdle rates for new bids.
We find comfort in industry leaders with strong b/s and reasonable valuation
Given uncertain global headwinds and the current lack of clarity on timelines for
some of the reforms, we find the valuations of JSPL and L&T reasonable vis-à-vis
the position in the cycle. JSPL benefits from twin rising deficits in power and long
steel products as competition in both segments has diminished due to the lack of
cheap fuel and iron ore. Likewise, in the case of L&T, we find early signs of
competition receding, especially in road bids and the transmission and distribution
sector. Key risks: (1) ability of government to usher in the development program,
the absence of which could hurt stock performances and (2) a depreciating rupee
could hurt developers, especially on forex loan exposure.
Jindal Steel and Power
We rate Jindal Steel & Power a Buy with for the following reasons:
Cheap fuel is increasingly scarce in India and we are seeing inflationary pressures from
imported fuel. JSPL is well placed to capitalize on these trends given its ~1.2bn tonnes
of low-cost captive coal assets.
We also find JSPL among the best-placed to capitalize on the reforms carried out by six
large power-consuming states. Note that all-India power demand growth has risen by 7-
8% over the last three quarters. Spot tariffs are on the rise. With most of its peers facing
rising fuel costs, we see JSPL's integrated energy model as a significant direct
beneficiary of these trends.
Our estimates forecast RoE to rise from 26% in FY12E to 28.6% in FY14E, with net debt
to equity below 100%, much lower than its Indian peers.
We also estimate that the company's power generation costs are in the bottom quartile
of cost curves in India, and this should come down further as the company is writing off
fixed costs at a much faster rate than its peers. This reduces the cyclicality of earnings.
Company-specific risks include a slowdown in project implementation, thereby missing the
capacity addition targets, a reduction in utilization levels, a delay in the development of
captive mines and obtaining fuel linkages, and regulatory intervention in the form of capping
merchant tariffs.
Thermax
We rate the stock as Buy with a target price of INR550, largely based on valuations:
With a sharp 49% fall in the stock price year to date and 26% underperformance relative
to the Sensex during the same period, the stock fully factors in a slowdown in the
investment cycle, especially in power capex, and the risk of a significant drop in order
inflows, order cancellations and rising working capital, in our view.
A recent increase in manufacturing capex is driving up Thermax’s product business
(c.50% sales).
While the projects business (remaining 50% of sales) should recover with the upturn in
the power capex cycle over the next 12-18 months, strong risk management has
ensured that the company has maintained a strong balance sheet, a high RoE and low
net working capital and sales, making it one of those best positioned for an upturn, in our
view.
A likely fall in commodity prices due to global macroeconomic headwinds could be a
positive for the stock.
We forecast a CAGR of 8% in sales (FY11-FY14), driving a net earnings CAGR of 7%
(FY11-14E). Our estimates are 3%, 18% and 13% below consensus for FY12, FY13 and
FY14, respectively. We believe our estimates factor in the stress in the projects
business, and the stock has an attractive P/E of 14x FY13E.
IRB
We rate IRB Infra a Buy:
After a 35% stock correction year-to-date, we find that valuations are factoring in virtually
zero value for the E&C business (26% of SoTP) and no attributable value for the latest
road wins.
With NHAI likely to make 63% more road awards in FY12E and competition withering
due to poor operating cash flows or net worth constraints, IRB seems to be one of the
few players (five out of 30-odd construction companies) that appears well positioned to
benefit from this upturn in our view.
Our SOTP-based 12-month target price is INR 192, which values the toll business on an
NPV basis (cost of equity of 12.5%) and the EPC business at 6x FY12E exit EV/EBITDA.
Slower execution and any further aggressive bids to win projects remain key risks
Coal India
Our Buy on Coal India (CIL) is based on the following:
After a c18% stock correction over the last three months on account of various negative
news flow about production constraints, wage negotiation and use of surplus cash
balance, the stock is now trading at P/E of 13x FY12E and 12x FY13E.
CIL has so far demonstrated a sustained high return on net operating assets (RNOA)
relative to global and regional peers, as high advances from customers have kept net
operating assets negative since FY08.
With indications from the Environment Ministry that it may relax, to some extent, its
tough stance on clearances for coal mining projects, there is a chance of a production
ramp-up at some of the existing mines.
Our target price of INR 430/sh is based on an average of the values derived using life-ofmine
DCF and P/E of 18x FY12E.
Key downside risks are lower-than-expected production growth due to delays in
environmental clearance, higher-than-expected operating costs and the profit-sharing
provisions in the proposed new 'Mining Bill' leading to earnings dips (depending on
when and how the act is implemented).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSPL and L&T are our top picks due to improving competitiveness
A recent spate of big ticket project approvals, coupled with government initiatives
for follow-on approvals for others, have led to hope that the ongoing cyclical
downturn may not become a structural slowdown. A lot depends on the timelines
for the passage of the mining bill, the auctioning of coal mines, and the land
reform bills for seamless development (akin to that witnessed in the road sector).
Our latest promoter/CFO survey suggests business confidence is improving at the
margin. At current valuations, we prefer industry leaders such as JSPL and L&T.
margin. At current valuations, we prefer industry leaders such as JSPL and L&T.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 146/04/2011.
Industry Update
Top picks
Jindal Steel & Power (JNSP.BO),INR487.75 Buy
Larsen & Toubro Ltd (LART.BO),INR1,265.80 Buy
Coal India Limited (COAL.BO),INR308.80 Buy
Thermax Limited (THMX.BO),INR448.85 Buy
IRB Infrastructure Dev. (IRBI.BO),INR145.45 Buy
Companies featured
Larsen & Toubro Ltd (LART.BO),INR1,265.80 Buy
2011A 2012E 2013E
P/E (x) 25.7 17.0 15.2
EV/EBITDA (x) 16.1 10.7 10.0
Price/book (x) 4.0 2.5 2.2
Coal India Limited (COAL.BO),INR308.80 Buy
2011A 2012E 2013E
P/E (x) 18.6 13.6 12.5
EV/EBITDA (x) 10.2 6.8 5.7
Price/book (x) 6.6 4.5 3.6
Jindal Steel & Power (JNSP.BO),INR487.75 Buy
2011A 2012E 2013E
P/E (x) 16.9 11.0 8.2
EV/EBITDA (x) 12.1 8.8 7.3
Price/book (x) 4.6 2.6 2.0
Siemens India Ltd (SIEM.BO),INR688.40 Hold
2010A 2011E 2012E
P/E (x) 29.7 27.1 20.4
EV/EBITDA (x) 15.6 15.1 10.4
Price/book (x) 8.4 5.8 4.7
IRB Infrastructure Dev. (IRBI.BO),INR145.45 Buy
2011A 2012E 2013E
P/E (x) 18.1 9.3 10.4
EV/EBITDA (x) 10.7 8.1 8.0
Price/book (x) 2.9 1.7 1.5
ABB Ltd India (ABB.BO),INR612.50 Sell
2010A 2011E 2012E
P/E (x) 276.8 44.2 25.4
EV/EBITDA (x) 201.8 26.4 15.6
Price/book (x) 6.9 4.9 4.1
Areva T&D (AREV.BO),INR194.85 Hold
2010A 2011E 2012E
P/E (x) 37.0 20.5 15.3
EV/EBITDA (x) 17.4 10.8 8.3
Price/book (x) 7.7 4.0 3.3
Thermax Limited (THMX.BO),INR448.85 Buy
2011A 2012E 2013E
P/E (x) 23.3 12.9 13.4
EV/EBITDA (x) 14.1 7.3 7.3
Price/book (x) 5.5 3.4 2.9
Competition in roads easing
0%
5%
10%
15%
20%
25%
30%
0
2
4
6
8
10
12
14
16
18
20
April July Aug 1st half Aug 2nd
half
Sep Nov
No.of bidders NPV Difference (RHS)
(No of
bidders)
(% of project
cost)
Global Markets Research Company
Business confidence improving at the margin
Over the last fortnight, the MoEF has given clearances for the Lavasa Project and
ToR for the 2,400MW Tamnar project being built by JSPL so that construction can
start. The government has a list of 12 projects for fast-track clearances. Our quick
survey with business leaders in the infrastructure space, including Jindal Group,
Coal India, L&T, Areva, and many others, suggests that with the exception of
projects stuck due to local political factors, clearances have started coming
through. It appears that project clearance may no longer be the biggest obstacle
for companies.
Hopes pinned on government initiatives to drive structural reforms
Notwithstanding the clearances of projects that have been stuck for more than a
year and doing away with the ‘go/no-go’ criteria for mine clearances, business
leaders are hoping that the land acquisition bill is passed by parliament sooner
rather than later. According to most, the provisions of the bill, if implemented,
would raise project costs by 7-10%, but the process of land acquisition would be
accelerated by more than one to two years. Allocation of coal mines through
bidding is another event to watch out for. While there is still a lack of non-skilled
workers, our survey suggests business leaders are investing in technology to
reduce labor dependence.
Falling rupee value and easing of competition are themes for next six months
The recent sharp fall in the rupee caught almost all companies unawares and
resulted in a scramble for forex cover, accentuating the currency movement.
However, industry leaders have made remarks that competition is easing --
Areva’s CEO notably suggested that there are no longer “suicide bombers” in
bids. Moreover, the data from recent road bids suggest that competition is easing
and companies have raised the hurdle rates for new bids.
We find comfort in industry leaders with strong b/s and reasonable valuation
Given uncertain global headwinds and the current lack of clarity on timelines for
some of the reforms, we find the valuations of JSPL and L&T reasonable vis-à-vis
the position in the cycle. JSPL benefits from twin rising deficits in power and long
steel products as competition in both segments has diminished due to the lack of
cheap fuel and iron ore. Likewise, in the case of L&T, we find early signs of
competition receding, especially in road bids and the transmission and distribution
sector. Key risks: (1) ability of government to usher in the development program,
the absence of which could hurt stock performances and (2) a depreciating rupee
could hurt developers, especially on forex loan exposure.
Jindal Steel and Power
We rate Jindal Steel & Power a Buy with for the following reasons:
Cheap fuel is increasingly scarce in India and we are seeing inflationary pressures from
imported fuel. JSPL is well placed to capitalize on these trends given its ~1.2bn tonnes
of low-cost captive coal assets.
We also find JSPL among the best-placed to capitalize on the reforms carried out by six
large power-consuming states. Note that all-India power demand growth has risen by 7-
8% over the last three quarters. Spot tariffs are on the rise. With most of its peers facing
rising fuel costs, we see JSPL's integrated energy model as a significant direct
beneficiary of these trends.
Our estimates forecast RoE to rise from 26% in FY12E to 28.6% in FY14E, with net debt
to equity below 100%, much lower than its Indian peers.
We also estimate that the company's power generation costs are in the bottom quartile
of cost curves in India, and this should come down further as the company is writing off
fixed costs at a much faster rate than its peers. This reduces the cyclicality of earnings.
Company-specific risks include a slowdown in project implementation, thereby missing the
capacity addition targets, a reduction in utilization levels, a delay in the development of
captive mines and obtaining fuel linkages, and regulatory intervention in the form of capping
merchant tariffs.
Thermax
We rate the stock as Buy with a target price of INR550, largely based on valuations:
With a sharp 49% fall in the stock price year to date and 26% underperformance relative
to the Sensex during the same period, the stock fully factors in a slowdown in the
investment cycle, especially in power capex, and the risk of a significant drop in order
inflows, order cancellations and rising working capital, in our view.
A recent increase in manufacturing capex is driving up Thermax’s product business
(c.50% sales).
While the projects business (remaining 50% of sales) should recover with the upturn in
the power capex cycle over the next 12-18 months, strong risk management has
ensured that the company has maintained a strong balance sheet, a high RoE and low
net working capital and sales, making it one of those best positioned for an upturn, in our
view.
A likely fall in commodity prices due to global macroeconomic headwinds could be a
positive for the stock.
We forecast a CAGR of 8% in sales (FY11-FY14), driving a net earnings CAGR of 7%
(FY11-14E). Our estimates are 3%, 18% and 13% below consensus for FY12, FY13 and
FY14, respectively. We believe our estimates factor in the stress in the projects
business, and the stock has an attractive P/E of 14x FY13E.
IRB
We rate IRB Infra a Buy:
After a 35% stock correction year-to-date, we find that valuations are factoring in virtually
zero value for the E&C business (26% of SoTP) and no attributable value for the latest
road wins.
With NHAI likely to make 63% more road awards in FY12E and competition withering
due to poor operating cash flows or net worth constraints, IRB seems to be one of the
few players (five out of 30-odd construction companies) that appears well positioned to
benefit from this upturn in our view.
Our SOTP-based 12-month target price is INR 192, which values the toll business on an
NPV basis (cost of equity of 12.5%) and the EPC business at 6x FY12E exit EV/EBITDA.
Slower execution and any further aggressive bids to win projects remain key risks
Coal India
Our Buy on Coal India (CIL) is based on the following:
After a c18% stock correction over the last three months on account of various negative
news flow about production constraints, wage negotiation and use of surplus cash
balance, the stock is now trading at P/E of 13x FY12E and 12x FY13E.
CIL has so far demonstrated a sustained high return on net operating assets (RNOA)
relative to global and regional peers, as high advances from customers have kept net
operating assets negative since FY08.
With indications from the Environment Ministry that it may relax, to some extent, its
tough stance on clearances for coal mining projects, there is a chance of a production
ramp-up at some of the existing mines.
Our target price of INR 430/sh is based on an average of the values derived using life-ofmine
DCF and P/E of 18x FY12E.
Key downside risks are lower-than-expected production growth due to delays in
environmental clearance, higher-than-expected operating costs and the profit-sharing
provisions in the proposed new 'Mining Bill' leading to earnings dips (depending on
when and how the act is implemented).
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