Sunday, June 13, 2010

>INDIA INFRASTRUCTURE: Next five years—bigger and better (UBS)

Sector set to grow strongly; government steps up debottlenecking
We forecast strong growth for the sector with likely ordering activity of US$300bn over three years and likely spending of US$500bn over five years. We also think the government has taken a number of measures over the past year to ease pre-execution hurdles (the major cause of delays in infrastructure development) in critical sectors such as power and roads. We believe there is an improvement in funding availability, a trend we think could continue.

Revenue visibility and robust margins should drive earnings
FY10 order inflows of engineering and construction (E&C) companies under our coverage were ahead of our expectations, and revenue visibility (order book) is at its peak for most. We expect revenue to pick up strongly in FY11, driven by larger project portfolios and an improved macroeconomic environment. We believe companies will largely be able to maintain their margins (at peak levels in FY10), driven by operating leverage and reasonable pricing (without compromising on margins).

E&C companies will benefit; L&T, BHEL and Nagarjuna are key plays
We prefer contractors and equipment suppliers under the infrastructure theme due to the earlier impact of rders on their earnings. We think strong ordering activity should keep multiples buoyant. Our top picks are: 1) L&T—multi-sector exposure, integrated model and strong financials; 2) Bharat Heavy Electricals (BHEL)—near-term earnings intact, operating leverage should drive margins; and 3) Nagarjuna Construction (Nagarjuna)—our preferred mid-cap play.

Among developers, we prefer power utilities
We prefer power utilities that have large merchant capacities and strong execution. Our top pick is Lanco Infratech (Lanco). Among the diversified developers under our coverage, we like GVK Power and Infrastructure (GVK) and Reliance Infrastructure due to their attractive valuations.

To read the full report: INDIA INFRASTRUCTURE