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