Stock Market Infrastructure Sector Result Review for 1QFY2012.

Stock Market Infrastructure Sector Result Review for 1QFY2012.

And they all fall down

Top-line growth goes for a toss; worrying sign: Most of C&EPC players (ten companies chosen for this analysis) have witnessed slowest growth on top-line front in 1QFY2012 on yoy basis in recent few quarters. We have mentioned in our earlier notes (read 4QFY2011 review) that sector has done well on top-line front (during those times) but earnings are marred given high interest rates and inflationary pressures. But given the dismal top-line performance this time around we believe that problems on earnings front would accentuate further in times to come. Further, we are not expecting any softening on interest rates and commodity front in next three-six months which will put further pressure on earnings. We believe these are worrying signs – given early monsoons this time, second quarter being seasonally the weakest quarter for C&EPC players and macro headwinds still surrounding the sector – demonstrating that earnings growth for next couple of quarters of these C&EPC players would remain muted.

Valuations are at abysmal levels, but we continue to remain selective: Share prices of C&EPC companies have taken a beating on the bourses after posting poor quarterly performance, bringing the stocks to very attractive levels on the valuations screen. But considering the various headwinds faced by the sector and no respite on the same we believe that stocks would feel the heat for some more time. Further, lack of positive news flow is not helping the sectors performance. Notwithstanding this it should be noted that there is pertinent need of infrastructure in the country and the economy would get derailed from its high growth trajectory if these needs are not met, which is acknowledged by one and all. Hence, we believe that the long term growth story for the sector remains intact. However, we believe that stock specific approach would yield higher returns given the disparity among these companies and changing dynamics affecting them positively/negatively. Hence, in current uncertain times we remain positive on companies having 1) comfortable leverage position (L&T and Sadbhav); 2) strong order book position (L&T, IVRCL and Sadbhav); 3) undemanding valuations (IVRCL) 4)  superior return ratios (L&T and Sadbhav); and 5) less dependence on capital markets for raising equity for funding projects (L&T and Sadbhav). Hence, we maintain L&T, IVRCL and Sadbhav as our top picks in the C&EPC space and recommend IRB in the development space after its recent fall bringing the stock to attractive levels.