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Thursday, March 31, 2011

Construction-All Is Well (Goldman Sachs)



Post the lull in road contract awards in 2H2010, NHAI has begun to show increased activity on both awards and incremental requests for qualifications. After awarding about 4,400 km up to end-Feb in FY11 (13 km/day vs. initial target of 20 km/day vs. past 3-year average of 4.5 km/day), NHAI is gearing up to step-up award activity from April onwards with about 11,000 km (worth
US$13.5 bn) of projects targeted for award by April 2012. Simultaneously, we believe the process of having annual qualification limits (instead of individual project-wise) is a step in the right direction and could help cut down project award timelines by up to 3 months.

Valuations are inexpensive and balance risk of aggressive bidding

Post the 16% and 31% fall ytd for IRB and ITNL, respectively, the stocks are currently trading at 12-m forward P/E of 10X and 9X, 36% discount to historical median for both, and 32% and 40% discount to MSCI India. We believe given the relatively modest size of the upcoming 100 projects (US$135 mn average size), large number of companies may continue to qualify on the required technical and networth criteria, increasing the risk of aggressive bidding for some of the projects in the near term.
Long term, we continue to view strong vehicle volume growth and current low toll rates in India as tailwinds for the sector.
Our picks: IRB and ITNL for their strong track record, robust order book and limited interest rate risk


IRB (IRBI.BO):
(1) 2,300 lane km of under-construction roads provide visibility on construction revenues; (2) Majority of debt is fixed-cost and the balance has no immediate interest rate reset; (3) Daily toll collection of Rs24 mn ensures sufficient cash flows for equity commitments, in our view. Maintain Buy and our 12-m SOTP-based TP of Rs234.  

ITNL(ILFT.BO):
(1) Order book of 10,500 km under construction and development along with 4,300 km of operational roads to drive 56% revenue CAGR over FY10-FY13E; (2) Similar to IRB, majority of debt is fixed-cost and balance has no immediate interest rate reset, which in our view is positive. Maintain Buy and our 12-m SOTP-based TP of Rs277.
Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.

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