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Institutional Equities
Exhibit 1: Fundamentals versus valuation
Cyclical nature of infrastructure sector
The infrastructure industry tracks the cyclical nature of the economy, which we have described in phases in
Exhibit No. 1, and accordingly the valuation parameters change. During FY10-11, the industry shifted from
the growth phase to the moderation phase because of macro factors like monetary tightening, rising interest
rates, trimmed gross domestic product (GDP) estimate and slack demand tracking the global slowdown.
Lower GDP growth, cancellation of orders, subdued Index of Industrial Production (IIP) growth and declining
profitability of companies are indicating that sector fundamentals are moving from the moderation phase to
the slowdown phase. We believe it would remain under the slowdown phase in the short term. However, the
sector’s valuation has already factored in the slowdown phase, as the stocks of infrastructure companies
have corrected between 60%-75% in the past one year (July 2010-August 2011) & trading at 33% to 47%
below their five-year historical average PE of 20x-44x and at 0.6x-1.2x their book value of our universe of
stocks.
Going ahead, even if the companies’ earnings are subdued in the short term, their stock prices will
start factoring in the recovery phase expected in FY13. Hence, we believe the stocks are trading at
below stress case level valuation and provide a good investment opportunity for investors.
Fundamentals
moving from
moderation to
slowdown
Current valuation
Source: Nirmal Bang Institutional Equities Research
3 Infrastructure Sector