>INDIA INFRASTRUCTURE (UBS)

Beneficiary of stable government

■ Expect long-term policy formulation for various sectors
We believe there are upside risks to our US$275bn assumption for spending on infrastructure in the XI Plan, given the stability and continuity of the central government. We highlighted four concerns in our projected spending: 1) the pace of project awards; 2) on-the-ground execution; 3) private sector equity; and 4) the cost of funds. With the election outcome, we expect points (1), (3) and (4) to be addressed as orders revive in sectors where substantial background work has been carried out (power, railways and roads), due to likely capital market revival, softening of interest rates and long-term policy formulation. Furthermore, continuity of the government in Andhra Pradesh could sustain momentum in irrigation orders.

■ Sentiment to improve; earnings momentum to be maintained
We increase our earnings expectations due to: 1) higher order in flow expectations in FY10 versus earlier estimated declines; 2) we think margins are likely to be maintained or there will be lower declines than earlier expected; 3) lower interest regime since the last quarter; and 4) likely revival in capital markets will aid PPP projects benefiting both developers and contractors. Even after these, our order inflow expectations are lower than company guidance (for L&T), and lower than growth rates for others in previous post election periods.

■ Upgrade L&T (UBS Key Call) to Buy; raise PT for other companies
We launch L&T as a Key Call today. We raise our price target for companies in the sector as we: 1) assume higher near-term EPS growth, 2) roll-forward to FY11; 3) lower our risk-free rate from 7% to 6.3%; and 4) better working capital availability. Our top picks are L&T, Reliance Infrastructure, IVRCL and Lanco.


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