Wednesday, March 25, 2009

>Infrastructure Sector (JM FINANCIAL)

Concerns remain…..

Infrastructure stocks have seen a sharp correction over the last 12 months. Reasons include rising interest rates (highlighted in our report dated 10th July 2008), reducing future order book visibility given slowdown in the capex cycle in a weak economic environment and sharp fall in real estate valuations leading to the decline in subsidiary valuations of the infrastructure companies. Where we believe valuations’ compression of subsidiaries has been accounted for, and interest rate pressures will ease off, visibility of future order book still remains lower than 12 months ago. Additionally, prospects of cancellations/delays in existing projects given the sharp economic slowdown still remain. For the purpose of future outlook, we analysed the annual budget outlays of states and government publications on achieved targets to get a sense of the spending patterns of the Xth five year plan. Our analysis surprised us positively, given that government spending has not seen substantial slippages. However, it must be noted that this was supported by a robust economic environment and reducing state fiscal deficits. Given the current weak macro-economic environment and upward pressures on deficits we have accounted for higher proportion of slippages in the planned infrastructure spending. Accordingly, we found that order flow prospects for FY10E do not appear encouraging…

Xth plan spending patterns encouraging: During the Xth plan we found slippages were not very high v/s planned spending patterns. States executed around 80% of planned spending across the irrigation, power and roads segments. The Centre slipped on irrigation targets substantially, but saw limited slippages in power, given it is driven by spending of companies like NTPC, NHPC and Power Grid.

Organized players market share seen rising during Xth plan: In context of the spending targets achieved during the Xth plan, companies under our coverage had the highest market share in power and lowest in roads with a rising trend seen across segments. Interestingly in terms of market share, L&T stands out in power, while IVRCL leads in irrigation.

XIth plan prospects healthy but….: For the XIth plan period Planning Commission forecasted a sharp jump in infrastructure investments. However, based on annualized spending patterns of the states during FY08-FY10E, we realized quite a bit of the spending is backended in nature. Although, this is similar to trends in the Xth plan, during that period it was supported by reducing fiscal deficits of states. Given this trend is unlikely to continue, we have budgeted higher slippages for the XIth plan.

Sector anticipated to continue underperformance: Based on the planned spending and derived market shares of companies, we have charted the anticipated order inflow during FY10E. Given the derived order inflows are muted, our earnings expectations is muted for FY11E. Based on our earnings expectations, we maintain L&T and Punj Lloyd will not give returns despite the share price correction and remain positive on IVRCL.