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India Infrastructure
Outlook 2012: is India likely to display
remarkable growth deceleration?
We do not believe so; accordingly, our top infra picks are CIL, JSPL and L&T
Heading into CY12, valuations (E&C, Coal India) seem to be factoring in deep
pessimism. Valuations imply a coal volume de-growth of ~2% CAGR over
FY13-20e and new order growth of 5-10% CAGR over FY13-20e vs. 25-30%
CAGR over FY02-11. Our lead indicators suggest a recovery as: (a) new project
approvals show signs of a pick-up (b) cement demand has rebounded of late (c)
CY11 power demand growth at a decade high. For CY12, key themes could be
valuations and recovery. We prefer companies with strong balance sheets, high
RoEs/FCF as being the best positioned to benefit from an upturn.
Valuations and cyclical recovery to be key themes in CY2012
While perceptions of pricing power emerged as a key differentiated theme for
CY11, for the coming year and beyond we believe that the following themes
could emerge: (a) capex cycle recovery – our expectation in early H2CY12; (b)
improving business confidence, especially on clearances; and restoration of
faith in capital markets; (c) pricing a big differentiator in energy themes, i.e.,
Coal India JSPL; (d) realignment (forced or friendly), a rate cut reversal may
help leveraged companies; and (f) currency could benefit exporters, hurting
earnings from unhedged forex liability.
Our top picks are among the best positioned for cyclical recovery
Our top picks in the pan-Indian infrastructure coverage universe are companies
that offer: (a) benefits from operating leverage as and when the economy
recovers; (b) a strong balance sheet and RoE, giving us comfort that companies
are not stuck with receivables; (c) either strong FCF or earnings yields, which
offer some cushion to valuations and (d) reverse DCF, which suggests that
stocks are currently factoring in deep pessimism. Stocks that fit in these
metrics are Coal India, JSPL, L&T, ACC and NTPC.
Our target prices are based on a combination of mid-cycle multiples and DCF
After the series of consensus downgrades, we now find our estimates largely
in line with consensus. Our 12-month target prices are premised on 16x oneyear
forward exit P/E for E&C companies and Coal India, and USD125 EV/t for
cement names. For power utility names, we use a combination of project DCF,
using 12.5% CoE for operational projects and 13-15% for projects under
construction. For PSUs, which operate under two-part tariffs, we use exit
price/book target multiples of 2-2.25 regulated equity, as per the Gordon
Growth Model. Key risks:(a) recovery in India’s investment cycle gets pushed
back by another year; (b) Coal India rolls back to the previous pricing
mechanism; (c) the cement industry players once again shift their objectives
from maintaining discipline to market share; resulting in price wars and (d) a
global slowdown resulting in a sharp reduction in worldwide coal prices, which
would hurt Coal India’s EPS as well as JSPL’s competitive strengths.
India’s premium infrastructure stocks at compelling valuations
Global headwinds and macro concerns have taken their toll on the entire Indian
infrastructure space, barring the cement sector. After the correction, our reverse DCF
for the premium infrastructure plays across our coverage suggest that valuations are
currently factoring in very low volume growth and, in some cases, negative volume
growth – illustrating a case for deep pessimism. Our reverse DCF valuation for three of
our top picks, Coal India, JSPL and Larsen & Toubro, is based on CoE of +13%, WACC
of 10.7-13.2%. In addition, terminal free cash flow growth of 2% beyond FY20E shows
the following volumes that each company needs to deliver:
Coal India: A negative volume growth of 1.5% over FY13-20E, assuming annual
regulated price inflation of 3% and considering the coal reserves of Coal India
as well as its production plan targets. From a historical perspective, coal price
inflation has been at a 5% CAGR over the last 10 years and volumes have
grown at a 5% CAGR for the last 10 years.
JSPL: In the first scenario, we have assumed that the steel business is valued
at 50% to replacement, implying long-term merchant rates at INR3.5/kWh over
the longer term. In the second scenario, we have assumed IPP unit valuations
at 1x P/B and mining assets at a 50% discount to NPV, implying steel EBITDA
would be at USD200/t and captive power would sell power at less than
INR2/kWh unit (c50% lower than current levels).
Larsen & Toubro: Important assumptions are that the IT division is valued at 8x
FY13E P/E, the infrastructure division is valued at 1x FY13E P/B and L&T
Finance at its current price. Under these assumptions, the core engineering
division’s new orders would need to grow at about 10% between FY12E and
FY20E and have long-term E&C margins of ~10%. Over last 10 years, L&T order
inflows have grown at 26% CAGR and E&C division margins have been on
average 11%. Assuming 6% long-term inflation, order inflow volume growth is
4% – much lower than Indian GDP.
While perceptions of pricing power led outperformance in CY11
Indian cement prices showed a remarkable resilience by inching up 5% in CY11 despite
low capacity utilisation. Notwithstanding weak demand-growth (one of the lowest in
the last decade), industry maturity helped the DB cement index outperform by c34% to
the BSE Sensex. Power Grid, with a tariff structure largely independent of operational
volumes, was poised to report a steady growth in earnings, outperforming the market
by 27%. Coal India, which had a stellar run after its listing, lost most of its gains on
perceptions of a lack of pricing power, especially in relation to additional cost for wages
and new mining taxes. Industrial stocks suffered on both accounts; weak order inflow
outlook and rising competition – a pointer toward lack of pricing power. Stocks such as
JSPL underperformed the market on perceptions of weak merchant tariffs and risk of
profits from operating captive coal block coming under regulatory scrutiny.
…Valuation comfort and recovery will emerge as key themes in
CY12
From an outperformance perspective; we list the following important themes for CY12:
(1) an upturn in capex cycle, notably driven by a resurgence of the construction
sector
Our sectoral hypothesis continues to be premised on a resurgence of the capex
cycle largely driven by the construction sector starting in H2CY12E. Our detailed
project-by-project tabulation suggests that construction sector orders in FY13E
could well touch INR1,353bn – primarily driven by roads/railways and a few export
orders. Mining capex could also show some progress, which could drive up power
capex by CY13E.
(2) , benefits flowing from operating leverage
The companies that stand out in terms of having the benefits of operating leverage
are ACC, JPA and Ultratech in cement and NTPC and Adani Power in utilities.
Within our diversified universe, JSPL can benefit significantly from volume growth
as many capacities with captive mines are up for commissioning in the next few
years. Coal India and Larsen & Toubro also have high fixed costs and could once
again derive high benefits of operating leverage.
(3) , improving business confidence especially on clearances
It is interesting to note that we are steadily seeing an increase in project approvals
at the Ministry of Environment and Forest. From a low of nine clearances in
Q3CY11, we now find that the government is approving seven projects per month.
While this is far below the peak clearances that we saw in FY07, this seems to have
had an immediate impact in the business confidence index, which has moved up
after a gap of five months.
(4) , pricing could be a big differentiator in energy themes: Coal India, JSPL
We find the biggest dichotomy between perceptions and reality in the coal
segment, with too much news floating around the recent coal price hike and
matters being referred to Indian high courts. While Indian courts are independent,
historical judgment on issues of energy prices shows that the Indian Supreme Court
had ruled that it is government’s prerogative to fix energy prices. Apart from Coal
India, another stock that could benefit from rising energy prices is JSPL, wherein
the company’s cost competitiveness of the business model becomes even better.
Thermax, in mid-caps, has products that offer boilers, which use a variety of
feedstock ranging from renewable to non-renewable and would also be a
beneficiary along with models such as ABB India and Siemens India that offer
energy-savings products.
(5) , realignment (forced or friendly), rate cut reversal may help leveraged
companies
After the Indian private sector banks facilitation of the sale of Andhra Cements to
the promoters of JPA, various assets are on the block as per management
communiqué and filings as shown in Figure 57. Our interactions with the project
teams of various institutions suggest that apart from the publicly-known potential
asset sales as listed in Figure 57, there could be many more transactions if the
existing promoters do not inject sufficient equity to cover the cost over-runs. Banks
would be keenly evaluating the financials of each stressed asset before exercising
any loan covenants. Highly leveraged companies could also benefit from the muchtalked-
about rate cycle reversal.
(6) , currency could benefit exporters, hurting earnings from un-hedged forex
liability
For E&C companies that are net exporters, the sharp depreciation in the Indian
rupee (INR) particularly against the US dollar (USD) and Chinese yuan (CNY) is
positive for exports, especially for contracts that were entered in CY12E. Also,
imports could become more difficult in India, making the cost differential between
Indian and Chinese vendors quite low. However, issue for all the companies would
be forex liability. For companies such as JSPL, the management communiqué
suggest that it would move the forex debt to its subsidiaries, which have forex
earnings to obtain a natural hedge. The new accounting norms would provide some
lee-way to Indian corporates in an effort to write off the losses closer to maturity.
However, some companies with forex debt, such as JPA, do not have a natural
hedge from forex earnings.
Our lead indicators continue to suggest capex cycle turnaround
Our lead indicators for the country’s economic activities, i.e., power volumes, cement
demand, environmental clearances, have all started showing an uptick. Our interaction
with promoters suggests that at the margin, funds are being committed to the
greenfield/brownfield projects by cash-rich developers. Furthermore, infrastructure
development banks have started saying that disbursements in Q4 for the segment could
be equal to that of the first three quarters, which suggests a capex cycle turnaround
sooner rather than later in this calendar year.
Our top picks are companies best positioned to benefit from
upturn
Our top picks in the pan-Indian infrastructure coverage universe are companies that
offer the following:
Benefits from operating leverage as and when the economy recovers
Strong balance sheet and RoE, giving us comfort that the company is not stuck
with large receivables in this downcycle
Either strong FCF or earnings yields, which offer some cushion to base-case
valuations
Reverse DCF, which suggests that the stock is currently factoring in deep
pessimism
ACC – Our top pick in the Indian cement sector segment
Recent outperformance has currently taken valuations to the third quartile of
the 17-year trading band. However, sustainable FCF of 8+% and cash/share of
INR121, could propel management to increase dividend payout.
ACC’s current utilisation rate of 78% shows good probability that the company
could deliver volume growth higher than the industry average as and when
cement demand picks up.
Key risk is that industry players start a price war and focus more on market
share.
Coal India – Our top pick in the Indian energy segment
The recent correction in the stock price has taken the valuation closer to
regional peers; an earnings yield of ~8% is strong support. Reverse DCF at
CMP implies negative volume growth of 2% over FY13-20E.
Initiatives for a price hike are likely to be approved as the delivered price of coal
in India on average remains at a 45% discount to international prices.
Re-start of approvals from MoEF is likely to drive up long-term volume growth,
which is a significant positive.
Strong cash balance raises the possibility of a one-time special dividend or
buyback, which is also a big positive.
A key risk is if the government directs the company to roll back the prices as
per prior methodology of sales.
Larsen & Toubro – Our top pick in the Indian industrials segment
The recent correction implies residual E&C valuations are at less than 10x – one
of the lowest in the last decade. At CMP, our reverse DCF factors in order
inflow growth of about 10% CAGR between FY12E and FY20E – much lower
than historical growth of 26% over FY01-11.
We expect the order inflow cycle to slowly turnaround by Q1FY13E, largely
driven by the revival of orders from road/rail sectors. With the competition
having weak balance sheets, L&T could be an early beneficiary of an uptick in
the capex cycle.
A good set of risk management policies is now in place and could ensure that
balance sheet strength is largely intact and the company is among the best
positioned within the sector to benefit from an upturn.
JSPL – Our top pick in the Indian conglomerate/energy segment
If we assume that the power business trades at price/book of 1x, then the
recent correction in the stock implies long-term steel business EBITDA/t of
USD200/t vs. USD300/t currently. In addition, captive power units’ realisations
would drop to less than INR2/unit. We believe that there is no additional
volume growth in the steel and captive power business over and above the
capacities under construction.
Conversely, if we assume that the steel business is valued at a 50% discount to
replacement, then the power business needs a merchant tariff of 3.5/kWh unit
for the rest of its life.
The earnings growth looks achievable as the company’s incremental capacity
growth is under the low quartile of the cost curve.
NTPC – Our top pick in the Indian regulated utility sector
NTPC's sharp underperformance over last three years has taken the valuations
closer to regional peers and is now trading at 1.6x P/B – valuations are near
2004 lows.
With its PLF at one of the lowest levels seen in the last three years, NTPC
seems to be one of the few models that could cater to India’s power demand
as private IPPs struggle to procure coal or change the commercial terms of
their agreement. Also, incremental volume from hydro and nuclear power
projects is likely to be limited.
Critical catalysts will be monthly volume growth and start of captive coal.
Thermax – Our top pick among the Indian mid-cap industrials segment
The recent correction of the stock price implies that the company needs a new
order CAGR of 10% over FY13-20E vs. 30% achieved over the last eight years.
The Thermax product offering, especially in areas of energy renewable, is likely
to drive medium-term growth.
Thermax’s risk management looks quite good as its NWC/sales continue to be
well below 20%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Infrastructure
Outlook 2012: is India likely to display
remarkable growth deceleration?
We do not believe so; accordingly, our top infra picks are CIL, JSPL and L&T
Heading into CY12, valuations (E&C, Coal India) seem to be factoring in deep
pessimism. Valuations imply a coal volume de-growth of ~2% CAGR over
FY13-20e and new order growth of 5-10% CAGR over FY13-20e vs. 25-30%
CAGR over FY02-11. Our lead indicators suggest a recovery as: (a) new project
approvals show signs of a pick-up (b) cement demand has rebounded of late (c)
CY11 power demand growth at a decade high. For CY12, key themes could be
valuations and recovery. We prefer companies with strong balance sheets, high
RoEs/FCF as being the best positioned to benefit from an upturn.
Valuations and cyclical recovery to be key themes in CY2012
While perceptions of pricing power emerged as a key differentiated theme for
CY11, for the coming year and beyond we believe that the following themes
could emerge: (a) capex cycle recovery – our expectation in early H2CY12; (b)
improving business confidence, especially on clearances; and restoration of
faith in capital markets; (c) pricing a big differentiator in energy themes, i.e.,
Coal India JSPL; (d) realignment (forced or friendly), a rate cut reversal may
help leveraged companies; and (f) currency could benefit exporters, hurting
earnings from unhedged forex liability.
Our top picks are among the best positioned for cyclical recovery
Our top picks in the pan-Indian infrastructure coverage universe are companies
that offer: (a) benefits from operating leverage as and when the economy
recovers; (b) a strong balance sheet and RoE, giving us comfort that companies
are not stuck with receivables; (c) either strong FCF or earnings yields, which
offer some cushion to valuations and (d) reverse DCF, which suggests that
stocks are currently factoring in deep pessimism. Stocks that fit in these
metrics are Coal India, JSPL, L&T, ACC and NTPC.
Our target prices are based on a combination of mid-cycle multiples and DCF
After the series of consensus downgrades, we now find our estimates largely
in line with consensus. Our 12-month target prices are premised on 16x oneyear
forward exit P/E for E&C companies and Coal India, and USD125 EV/t for
cement names. For power utility names, we use a combination of project DCF,
using 12.5% CoE for operational projects and 13-15% for projects under
construction. For PSUs, which operate under two-part tariffs, we use exit
price/book target multiples of 2-2.25 regulated equity, as per the Gordon
Growth Model. Key risks:(a) recovery in India’s investment cycle gets pushed
back by another year; (b) Coal India rolls back to the previous pricing
mechanism; (c) the cement industry players once again shift their objectives
from maintaining discipline to market share; resulting in price wars and (d) a
global slowdown resulting in a sharp reduction in worldwide coal prices, which
would hurt Coal India’s EPS as well as JSPL’s competitive strengths.
India’s premium infrastructure stocks at compelling valuations
Global headwinds and macro concerns have taken their toll on the entire Indian
infrastructure space, barring the cement sector. After the correction, our reverse DCF
for the premium infrastructure plays across our coverage suggest that valuations are
currently factoring in very low volume growth and, in some cases, negative volume
growth – illustrating a case for deep pessimism. Our reverse DCF valuation for three of
our top picks, Coal India, JSPL and Larsen & Toubro, is based on CoE of +13%, WACC
of 10.7-13.2%. In addition, terminal free cash flow growth of 2% beyond FY20E shows
the following volumes that each company needs to deliver:
Coal India: A negative volume growth of 1.5% over FY13-20E, assuming annual
regulated price inflation of 3% and considering the coal reserves of Coal India
as well as its production plan targets. From a historical perspective, coal price
inflation has been at a 5% CAGR over the last 10 years and volumes have
grown at a 5% CAGR for the last 10 years.
JSPL: In the first scenario, we have assumed that the steel business is valued
at 50% to replacement, implying long-term merchant rates at INR3.5/kWh over
the longer term. In the second scenario, we have assumed IPP unit valuations
at 1x P/B and mining assets at a 50% discount to NPV, implying steel EBITDA
would be at USD200/t and captive power would sell power at less than
INR2/kWh unit (c50% lower than current levels).
Larsen & Toubro: Important assumptions are that the IT division is valued at 8x
FY13E P/E, the infrastructure division is valued at 1x FY13E P/B and L&T
Finance at its current price. Under these assumptions, the core engineering
division’s new orders would need to grow at about 10% between FY12E and
FY20E and have long-term E&C margins of ~10%. Over last 10 years, L&T order
inflows have grown at 26% CAGR and E&C division margins have been on
average 11%. Assuming 6% long-term inflation, order inflow volume growth is
4% – much lower than Indian GDP.
While perceptions of pricing power led outperformance in CY11
Indian cement prices showed a remarkable resilience by inching up 5% in CY11 despite
low capacity utilisation. Notwithstanding weak demand-growth (one of the lowest in
the last decade), industry maturity helped the DB cement index outperform by c34% to
the BSE Sensex. Power Grid, with a tariff structure largely independent of operational
volumes, was poised to report a steady growth in earnings, outperforming the market
by 27%. Coal India, which had a stellar run after its listing, lost most of its gains on
perceptions of a lack of pricing power, especially in relation to additional cost for wages
and new mining taxes. Industrial stocks suffered on both accounts; weak order inflow
outlook and rising competition – a pointer toward lack of pricing power. Stocks such as
JSPL underperformed the market on perceptions of weak merchant tariffs and risk of
profits from operating captive coal block coming under regulatory scrutiny.
…Valuation comfort and recovery will emerge as key themes in
CY12
From an outperformance perspective; we list the following important themes for CY12:
(1) an upturn in capex cycle, notably driven by a resurgence of the construction
sector
Our sectoral hypothesis continues to be premised on a resurgence of the capex
cycle largely driven by the construction sector starting in H2CY12E. Our detailed
project-by-project tabulation suggests that construction sector orders in FY13E
could well touch INR1,353bn – primarily driven by roads/railways and a few export
orders. Mining capex could also show some progress, which could drive up power
capex by CY13E.
(2) , benefits flowing from operating leverage
The companies that stand out in terms of having the benefits of operating leverage
are ACC, JPA and Ultratech in cement and NTPC and Adani Power in utilities.
Within our diversified universe, JSPL can benefit significantly from volume growth
as many capacities with captive mines are up for commissioning in the next few
years. Coal India and Larsen & Toubro also have high fixed costs and could once
again derive high benefits of operating leverage.
(3) , improving business confidence especially on clearances
It is interesting to note that we are steadily seeing an increase in project approvals
at the Ministry of Environment and Forest. From a low of nine clearances in
Q3CY11, we now find that the government is approving seven projects per month.
While this is far below the peak clearances that we saw in FY07, this seems to have
had an immediate impact in the business confidence index, which has moved up
after a gap of five months.
(4) , pricing could be a big differentiator in energy themes: Coal India, JSPL
We find the biggest dichotomy between perceptions and reality in the coal
segment, with too much news floating around the recent coal price hike and
matters being referred to Indian high courts. While Indian courts are independent,
historical judgment on issues of energy prices shows that the Indian Supreme Court
had ruled that it is government’s prerogative to fix energy prices. Apart from Coal
India, another stock that could benefit from rising energy prices is JSPL, wherein
the company’s cost competitiveness of the business model becomes even better.
Thermax, in mid-caps, has products that offer boilers, which use a variety of
feedstock ranging from renewable to non-renewable and would also be a
beneficiary along with models such as ABB India and Siemens India that offer
energy-savings products.
(5) , realignment (forced or friendly), rate cut reversal may help leveraged
companies
After the Indian private sector banks facilitation of the sale of Andhra Cements to
the promoters of JPA, various assets are on the block as per management
communiqué and filings as shown in Figure 57. Our interactions with the project
teams of various institutions suggest that apart from the publicly-known potential
asset sales as listed in Figure 57, there could be many more transactions if the
existing promoters do not inject sufficient equity to cover the cost over-runs. Banks
would be keenly evaluating the financials of each stressed asset before exercising
any loan covenants. Highly leveraged companies could also benefit from the muchtalked-
about rate cycle reversal.
(6) , currency could benefit exporters, hurting earnings from un-hedged forex
liability
For E&C companies that are net exporters, the sharp depreciation in the Indian
rupee (INR) particularly against the US dollar (USD) and Chinese yuan (CNY) is
positive for exports, especially for contracts that were entered in CY12E. Also,
imports could become more difficult in India, making the cost differential between
Indian and Chinese vendors quite low. However, issue for all the companies would
be forex liability. For companies such as JSPL, the management communiqué
suggest that it would move the forex debt to its subsidiaries, which have forex
earnings to obtain a natural hedge. The new accounting norms would provide some
lee-way to Indian corporates in an effort to write off the losses closer to maturity.
However, some companies with forex debt, such as JPA, do not have a natural
hedge from forex earnings.
Our lead indicators continue to suggest capex cycle turnaround
Our lead indicators for the country’s economic activities, i.e., power volumes, cement
demand, environmental clearances, have all started showing an uptick. Our interaction
with promoters suggests that at the margin, funds are being committed to the
greenfield/brownfield projects by cash-rich developers. Furthermore, infrastructure
development banks have started saying that disbursements in Q4 for the segment could
be equal to that of the first three quarters, which suggests a capex cycle turnaround
sooner rather than later in this calendar year.
Our top picks are companies best positioned to benefit from
upturn
Our top picks in the pan-Indian infrastructure coverage universe are companies that
offer the following:
Benefits from operating leverage as and when the economy recovers
Strong balance sheet and RoE, giving us comfort that the company is not stuck
with large receivables in this downcycle
Either strong FCF or earnings yields, which offer some cushion to base-case
valuations
Reverse DCF, which suggests that the stock is currently factoring in deep
pessimism
ACC – Our top pick in the Indian cement sector segment
Recent outperformance has currently taken valuations to the third quartile of
the 17-year trading band. However, sustainable FCF of 8+% and cash/share of
INR121, could propel management to increase dividend payout.
ACC’s current utilisation rate of 78% shows good probability that the company
could deliver volume growth higher than the industry average as and when
cement demand picks up.
Key risk is that industry players start a price war and focus more on market
share.
Coal India – Our top pick in the Indian energy segment
The recent correction in the stock price has taken the valuation closer to
regional peers; an earnings yield of ~8% is strong support. Reverse DCF at
CMP implies negative volume growth of 2% over FY13-20E.
Initiatives for a price hike are likely to be approved as the delivered price of coal
in India on average remains at a 45% discount to international prices.
Re-start of approvals from MoEF is likely to drive up long-term volume growth,
which is a significant positive.
Strong cash balance raises the possibility of a one-time special dividend or
buyback, which is also a big positive.
A key risk is if the government directs the company to roll back the prices as
per prior methodology of sales.
Larsen & Toubro – Our top pick in the Indian industrials segment
The recent correction implies residual E&C valuations are at less than 10x – one
of the lowest in the last decade. At CMP, our reverse DCF factors in order
inflow growth of about 10% CAGR between FY12E and FY20E – much lower
than historical growth of 26% over FY01-11.
We expect the order inflow cycle to slowly turnaround by Q1FY13E, largely
driven by the revival of orders from road/rail sectors. With the competition
having weak balance sheets, L&T could be an early beneficiary of an uptick in
the capex cycle.
A good set of risk management policies is now in place and could ensure that
balance sheet strength is largely intact and the company is among the best
positioned within the sector to benefit from an upturn.
JSPL – Our top pick in the Indian conglomerate/energy segment
If we assume that the power business trades at price/book of 1x, then the
recent correction in the stock implies long-term steel business EBITDA/t of
USD200/t vs. USD300/t currently. In addition, captive power units’ realisations
would drop to less than INR2/unit. We believe that there is no additional
volume growth in the steel and captive power business over and above the
capacities under construction.
Conversely, if we assume that the steel business is valued at a 50% discount to
replacement, then the power business needs a merchant tariff of 3.5/kWh unit
for the rest of its life.
The earnings growth looks achievable as the company’s incremental capacity
growth is under the low quartile of the cost curve.
NTPC – Our top pick in the Indian regulated utility sector
NTPC's sharp underperformance over last three years has taken the valuations
closer to regional peers and is now trading at 1.6x P/B – valuations are near
2004 lows.
With its PLF at one of the lowest levels seen in the last three years, NTPC
seems to be one of the few models that could cater to India’s power demand
as private IPPs struggle to procure coal or change the commercial terms of
their agreement. Also, incremental volume from hydro and nuclear power
projects is likely to be limited.
Critical catalysts will be monthly volume growth and start of captive coal.
Thermax – Our top pick among the Indian mid-cap industrials segment
The recent correction of the stock price implies that the company needs a new
order CAGR of 10% over FY13-20E vs. 30% achieved over the last eight years.
The Thermax product offering, especially in areas of energy renewable, is likely
to drive medium-term growth.
Thermax’s risk management looks quite good as its NWC/sales continue to be
well below 20%.
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