UBS:: India Construction - Valuations attractive; NCC preferred

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UBS Investment Research
India Construction Note
V aluations attractive; NCC preferred
􀂄 Event: Construction stocks underperformed ~30% in last three months
Mid-cap construction companies have underperformed the Sensex by about 30% in
the last three months. Key reasons in our view include: 1) high interest rates, 2)
increased leverage, and 3) poor Q1FY12 results. We think most of the concerns are
in the price and valuations are compelling at ~0.5x FY12E book. Key catalysts
include: 1) H2 is typically strong for construction activity; and 2) companies taking
measures to reduce leverage (though improved collection efficiencies and asset
sales). Despite near-term challenges, risk-reward looks favourable.
􀂄 Impact: Reducing earnings factoring lower execution/higher interest costs
Q1FY12 results of construction companies were below expectations primarily due
to lower execution and higher interest costs- we make changes and expect flat to
8% revenue growth (vs. ~15% earlier). We also assume higher interest costs. Now,
we are about 25% below consensus on earnings.
􀂄 Action: NCC is top pick, maintain Buy on IVRCL and Sell on Punj
Key triggers for NCC over next 12m include: 1) commissioning of Pondicherry
road/Himachal Sorang power projects by Sep11/Mar-12, 2) potential PE funding in
infra vertical, and 3) Rs50bn order from Nelcast power project. For Punj, we
believe risks still remain: 1) Disputes pertaining to the ONGC contract (arbitration
process could be long-drawn); and 2) recovery of assets in Libya/Simon Carves.
􀂄 Valuations: Multiples close to trough levels
NCC/IVRCL’s core construction business is trading at 6x/5x FY12 EPS. Though
Punj is trading at 0.6x P/B, risks to earnings are quite significant in our view.