>INDIAN INFRASTRUCTURE (JP MORGAN)

Time to put money to work

• Stocks have run up - what next? An infrastructure-focused stable government and return of funding appetite have caused a 15%-72% rally in infra names over the last one-month. Our top picks at this time are: 1) stocks where there is more to look forward to, despite the run-up (eg: RELI, remains OW with new PT of Rs1,500), 2) laggards where potential catalysts are not priced in (eg: TPWR, upgraded to OW with new PT of Rs1,270), and 3) Mid-caps with substantial valuation arbitrage (e.g.: Crompton Greaves, upgraded to OW with new PT of Rs300). L&T, our preferred capital goods pick, appears fairly valued from an absolute perspective but we believe it will continue to outperform BHEL.

• Valuations in line with historical averages While valuation multiples for this sector have recovered from the Jan-09 abyss, they are far from the scary zone of Sep-Dec-07, and more in-line with historical averages. An unprecedented phase of investment-friendly stable government, coupled with the fact that projects which were quite nascent 2 years back have made silent progress, should provide valuation support to infra names, in our view. Amongst infra subsectors, we believe power and infra conglomerates will likely outperform their cap goods counterparts, as dormant projects turn value-accretive.

• 12 catalysts and 12 ministers: Our ‘catalyst scorecard’ in this report tabulates 12 major expected events over the next 12 months and impact on our stocks’ earnings / valuations. Our politics scorecard describes 12 key ministers who would influence infra spending, and the changes they would bring. The government would continue its relentless focus on power, in our view, and we see catalysts in the form of new project announcements, funding tie-ups, faster clearances for dormant projects, bulk tendering of supercritical equipment, nuclear ordering and pick-up in T&D investments. With the Left now out of the government, the UPA may want to improve its track record in stake divestures, private infra projects and non-power infra areas: thus we see road BOTs and airport privatizations picking up pace.

To see full report: INDIAN INFRASTRUCTURE