Saturday, October 2, 2010

>INDIA CONSTRUCTION SECTOR: Concerns overdone; risk-reward ratio favourable

Strong order inflows, improved credit scenario and better execution capabilities are expected to accelerate revenue momentum for India construction sector in the coming quarters. We expect our coverage universe to report 16%/23% YoY growth in revenue for FY11/12 (8% in FY10).
With the recent correction, the risk-reward ratio for select construction companies has turned favourable, in our view. Revival in execution and pick-up in industrial/international orders will be the key triggers for construction companies in the near to medium term. Simplex Infrastructure (SINF) and Nagarjuna Construction (NJCC) are our top-picks in the sector with 20%+ potential upside from current levels.

Investment Highlights
Ordering opportunity for construction players pegged at US$109 bn between FY10-12E
We peg the ordering opportunity for construction companies at US$109 bn over the next two years led by acceleration in awarding of national highway projects and increasing opportunities in the power sector. Road/power/irrigation/railway sector are expected to contribute 40%/24%/14%/13% of the total orders.

Infrastructure investment robust despite slippages
Despite slippages in meeting target, infrastructure investment (ex-storage, oil & gas and telecom) has seen a 17% CAGR in the past five years. In FY10, infrastructure spending increased to US$69 bn or 5.8% of GDP (5.0% in FY04). As per revised projections, US$349 bn (ex-storage, oil & gas and telecom) is expected to be invested in the 11th Plan (US$170 bn in the 10th Plan), with private sector contribution expected at 25% (22% in the 10th Plan).

Strong order inflows in H2FY10 to accelerate revenue growth in H2FY11/FY12
Economic slowdown and general elections led to muted order inflows in H2FY09 and H1FY10. Order inflows, however, have picked-up since H2FY10 (up 74% YoY). Due to the back-ended nature of revenues, we expect our coverage universe (SINF, NJCC, IVRCL and HCC) to report a 16% YoY growth in revenues for FY11 (8% YoY growth in Q1FY11) and 23% YoY growth for FY12.

Risk-reward ratio favourable; SINF and NJCC our top-picks
After outperforming the broader markets during the pre-crisis period, construction stocks have been a consistent underperformer since May 2008. Against a 2% return generated by Sensex between May 2008 and August 2010, our coverage universe has delivered a negative 25% return.

With earnings momentum expected to pick-up in the coming quarters, select construction stocks are trading at attractive valuations (available at 9-12x our FY12 EPS). Within the construction space, we prefer SINF and NJCC due to their (1) diversified order book (2) better working capital position (3) conservative approach to BOT projects and (4) attractive valuations. We have valued construction companies based on SOTP methodology. For the core construction business, we have assigned earnings multiple in the range of 10-15x, based on certain quantitative and qualitative factors. The listed (unlisted) subsidiaries of construction companies are valued at 30% discount to CMP (1x book value). We initiate coverage on SINF, NJCC and IVRCL with a BUY rating and maintain our HOLD rating on HCC.

To read the full report: INDIA CONSTRUCTION SECTOR


We are suggesting 10 midcap stocks in this Midcap Monitor report which we believe have 35 -
50% upside by Dec.-2011. We have selected the following stocks from the entire gamut of
Midcap growth story -

1) Ashok Leyland

2) KEC International
3) Glenmark Pharmaceuticals
4) Educomp Solutions
5) Petronet LNG
6) Sintex Industries
7) Sobha Developers
8) Mahindra & Mahindra Financial Services Ltd
9) Shree Cement
10) Voltas

India’s medium-term economic growth story continues to remain healthy on account of a revival in demand - the current year looks particularly good given the better monsoon and its impact on rural demand.

Till September 29 this year, FIIs have invested about Rs 85,340 crore in the Indian markets, which is among the largest inflows in recent years and a lot of foreign money has flowed into the largecap stocks. Therefore, midcaps have underperformed in the recent past. The BSE Midcap index has delivered only 6.14% returns in the last one month vis-a-vis the Sensex’s 10.8% returns.

To read the full report: MIDCAP STOCKS

>JAIPRAKASH ASSOCIATES: Well placed to benefit from infrastructure creation

Jaiprakash Associates, has underperformed the broader market by around 39%
in the past one year on account of some overhangs in terms of a potential sale
of its treasury stock, a delay in the execution of its Yamuna Expressway project
due to farmers’ protests and its plan to enter into the non-related fertiliser

With regards the farmers’ protests against the Yamuna Expressway project in
Uttar Pradesh for a justifiable compensation for land to be surrendered by
them, the government has decided to go back to the drawing board to create
an expressway authority and decide the funding pattern for the projects. Due
to the farmers’ protests, the work of the company suffered for about 20 days
at a particular stretch on the expressway. We believe the issue is negative for
the company as it may lead to a delay in the execution time of the project or
could lead to an increase in the cost of the project. On the real estate front,
the company could sell about 5.1 million square feet (sq ft; as on August 31). At
the moment the company is constructing almost 20 million sq ft and hopes to
start deliveries next year from June 2011.

Further, the company is also looking to make a foray in the business of
manufacturing and marketing of fertilisers, either on its own or through a special
purpose vehicle (SPV). As per media reports, JP Associates is looking to acquire
a controlling stake of nearly 74% in the fertiliser division of Duncans Industries.
The fertiliser division of Duncans Industries is proposed to be hived off into a
separate entity. Duncans Industries’ fertiliser unit is located at Panki in Uttar
Pradesh and is non-operational at present. We believe the company’s likely
foray into the fertiliser business is also an overhang on the stock as it is not
related to its present business model.

The re-rating triggers for the stock will be an improving outlook for the real
estate companies, better than expected execution of its expressway and power
projects, and a better than expected performance of its cement division, which
contributes around 40% of its overall revenue.

To read the full report: JAIPRAKASH ASSOCIATES


COMPANY BRIEF: Hyderabad Industries Ltd. (HIL) is one of the leading manufacturers of
Fibre Cement Sheets in India with a market share of about 20.5%. Its key product range include Fibre Cement Roofing Sheets sold under the brand name CHARMINAR, AAC Blocks and Panels called AEROCON, and Calcium Silicate Insulation Product (thermal insulation) called HYSIL.

⇒ HIL has an extensive presence across the country and enjoys premium brand equity in the market based on superior quality, strength and durability.

⇒ The company has diversified into value added (environmental friendly green) products, which will de‐risk its business model and diversify its revenue stream. Given the diversification into value added products, we strongly believe that HIL is due to get re‐rated and command much higher multiple in times to come.

⇒ Demand of such green building products is increasing across the world on account of serious concerns about the environment and the impact on energy consumption.

⇒ HIL is increasing the cement sheet capacity by 180000 tpa to 1079500 tpa & thermal insulation by 3000 tpa to 11500 tpa in CY11. This will help the company to keep pace with the growing demand for its products and retain significant share in the market.

⇒ Relatively speaking, HIL has far superior earnings profile and return ratios in comparison to its peers. It has a stronger balance sheet with a Debt:Equity Ratio of 0.3, ROCE of ~44%. The company has the highest operating margins in comparison to its peers.

⇒ At the current price of ` 624, the stock trades at a P/E multiple of 4.1 x FY12E earnings and P/BV multiple 1.0 x FY12E earnings. We recommend a “BUY” on the stock with a price target of ` 754, assuming a P/E multiple of 5 x FY12E earnings, an upside of 21% from the current levels, over a period of 12 months.

To read the full report: HIL

>RANBAXY LABORATORIES: Multiple triggers ahead; Upgrade to Hold

■ Worst is behind; Multiple triggers ahead
■ These triggers present potential upsides of Rs120
■ Factored in only triggers like - hive-off of NCE R&D and monetization of Aricept FTF- which have already kicked in
■ Upgrade to ‘Hold’ and raise target price to Rs520. Have a positive bias on the stock but will factor in upsides only on occurrence of triggers

To read the full report: RANBAXY LABS