>India: Construction: Infrastructure (GOLDMAN SACHS)

Industry context: On-the-ground execution is robust
Our analysis of projects in the Indian infrastructure sector shows a strong improvement in execution as well as a robust depth in projects to be executed over the next three years. Leading indicators of execution pickup like lending to infrastructure (47% growth vs. 10% industry credit growth over the past 12 months) and demand for infrastructure inputs like cement (21% increase in dispatches over past four months) are showing very strong upwards momentum.

Strong pipeline to drive growth; Sell-off creates opportunities

Source of opportunity: Sell-off creates attractive entry levels: We maintain our attractive stance on the Indian infrastructure sector as we believe spending on this sector is increasing at a rapid pace, offering substantial asset growth opportunities. Share prices have moved -21% to -2% ytd, offering some attractive entry levels. Valuations are at a 19% discount to median despite an estimated 30% sales CAGR and an average ROE improvement of c.400 bp over FY10E-FY12E for our Buy-rated stocks.

Best Buy ideas: IVRCL, IRB and JPA: We recommend IVRCL (Buy, on Conviction list, 61% potential upside), IRB (Buy, 35%) and JPA (Buy, 44%). Our Conviction list stock, IVRCL, has outperformed L&T in the last seven out of nine years, including this year, and – driven by higher earnings growth and multiple expansions – we expect the outperformance to continue for the rest of the year. Following the release of 3Q results, we have revised our FY10E-FY12E EPS estimates for our capital goods and infrastructure coverage groups by -27% to +10%, and our 12-month target prices by -8% to +9%.

Best Sell idea: We continue to hold a structurally negative view on BHEL (Sell, on Conviction list, 23% potential downside) due to its high valuations not reflecting upcoming risks that we foresee related to pricing and profitability.

Catalysts
New project awards and commissioning of projects under construction, reflected in strong quarterly growth, remain key catalysts.

To read the full report: CONSTRUCTION SECTOR