Institutional Equities - Online Share Trading

Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Sep-11
Institutional Equities
Stress case valuation level indicating downturn is already priced in
During the past one year, the infrastructure sector’s revenues (infrastructure developers and construction
companies) have gone up by 17% and earnings by 6.3%. However, given the multiple issues such as slower
order inflow, rising interest rates, regulatory issues, delay in project execution and depressed return ratios, the
stock prices of infrastructure companies have corrected by around 60% to 75% between July2010-August
2011. Post correction, the stocks are trading at 33% to 47% discount to their five-year historical average PE of
20x-44x and at 0.6-1.2x book value, thereby appearing attractive for investment. The stocks are trading
below their historical trough valuation, close to the levels witnessed after the Lehman collapse, which
we believe is unjustified (as the companies are better placed in terms of order book-to-bill ratio,
leverage and return ratios). If we adjust the embedded value of investments in stock prices of construction
companies, they are trading at a PE multiple of 4x-6x on FY13. Hence, we believe the infrastructure stocks are
trading below stress case valuation level and have factored in the worst case scenario.
Exhibit 2: Stock price returns
Stock returns (%)
Companies Revenue (YoY %) PAT (YoY %) 1 month 3 months 6 months 1 year
IRB Infrastructure 43.0 17.0 3.8 4.0 (12.8) (42.7)
IVRCL 2.6 (25.0) 1.6 (40) (49) (77.8)
GMR Infrastructure 26.0 N/A 0.5 (8.2) (11.2) (51.7)
HCC 12.3 37.0 2.9 (1.6) (20.6) (51.9)
Reliance Infrastructure 2.7 2.1 (3.7) (20.0) (31.9) (59.2)
Source: Bloomberg, Nirmal Bang Institutional Equities Research
Exhibit 3: Infrastructure stocks versus Nifty performance
330
280
230
180
130
80
30
Over-expectation post Congressled
government in majority
Dubai ,Telangana issues
Scams
Rising interest
rates & earnings
cut
Exhibit 4: Coverage universe
Source: Bloomberg, Nirmal Bang Institutional Equities Research
Investment comfort based on valuation parameters
In FY12, we expect the construction companies to report a decline in return ratios following moderate growth
in earnings. However, during FY13, these companies would report robust growth driven by ongoing
concerns waning and the low base of FY12, thereby improving the return ratios. We believe the current
valuation indicates the risks and concerns have been factored in and investor sentiment towards the
sector is at its lowest level. Hence, we expect a re-rating of the sector to take place. Based on the riskreward
structure, the infrastructure sector provides a good investment opportunity.
Market cap CMP Target Up/ EPS (Rs) P/E (x) RoE (%)
Company Rating Rsbn US$ bn (Rs) price Down (%) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E
IRB Infra Buy 54.1 1.1 163 235 44 13.6 14.0 18.0 12.0 11.7 9.1 18.6 16 17.1
Reliance Infra Buy 116 2.3 434 724 67 58.0 60.6 72.6 7.4 7.1 5.9 6.6 6.5 7.3
GMR Infra Buy 110.4 2.2 28 39 39 (0.3) 0.2 1.2 NA 134.4 22.8 NA 1.0 5.8
HCC Hold 17.4 0.38 29 33 14 1.2 0.8 1.5 23.9 33.1 18.7 4.7 3.3 5.7
IVRCL Buy 10 0.20 38 59 55 5.9 5.1 6.7 6.3 7.3 5.6 8.2 6.6 8.1
Source: Company, Nirmal Bang Institutional Equities Research
GMR Infra R-Infra IVRCL IRB Infra HCC Nifty
4 Infrastructure Sector