Widening scope of operations
IVRCL is racing ahead of its peers to build scale and sustain
profitability. With relatively better profitability and a better growth
ratio than its peers, it's still our top pick. We upgrade Gammon to
Buy on our EPS upgrade and attractive valuations.

Increasing our sales forecasts for IVRCL and Gammon
Within our construction coverage universe, order inflow has clearly exceeded our
expectations. IVRCL continued to lead the pack with an 80% increase in order
backlog in 2008. This extends visibility for better sales momentum for the coming
years. Hence we increase our FY09-10 sales forecasts for IVRCL and Gammon by
about 5% and 10%, respectively. We expect National Highways Authority of India
(NHAI) Phase V to be awarded and industrial capex to provide better visibility for
FY08-10F order inflow. We expect companies to widen their scope of operations to
tap the increased size of orders in the traditional areas or expand into new areas such
as railways, oil & gas, etc.
Our EPS forecasts revisited
Due to sharp increases in input material costs, such as steel, cement and bitumen,
we have re-examined our EPS forecasts for our coverage universe. We increase our
EPS forecasts for Gammon by 5-12% for FY09-10, driven by a sales upgrade,
whereas we marginally adjust our EPS forecast for IVRCL. However, we cut our FY09-
10 EPS forecasts by a steep c19% for Nagarjuna and 35% for HCC, as a result of
execution slippage in FY08 for Nagarjuna and increasing funding costs for HCC.
Our subsidiary values trimmed sharply
Considering the sharp correction in some of the listed subsidiaries (especially real
estate subsidiaries) and the building impact of a higher cost of capital on BOT (buildoperate-
transfer) projects, we trim our subsidiary values by a sharp 18-41% across
the board for stocks in our coverage universe, led by IVRCL and Nagarjuna.
IVRCL and Nagarjuna are our top picks; we upgrade Gammon to Buy
High organic growth coupled with a relatively better ROE and expansion into new
growth avenues keep IVRCL and Nagarjuna ahead of the pack, in our view. We
maintain IVRCL as our top pick as it accelerates to gain size over its peers. We
upgrade Gammon to Buy from Sell given our EPS forecast upgrade and considering
an attractive valuation of 6.6x FY09, based on our forecasts.

Contents
C O N S T R U C T I O N & E N G I N E E R I N G 1 9 J U N E 2 0 0 8 2
I N V E S T M E N T V I E W
Enough order backlog to extend visibility 3
Except for IVRCL, Tier 2 construction companies in our coverage universe slipped
on FY08 sales and PAT. Given building cost pressure, we cut our EPS forecasts.
IVRCL remains our top pick and we upgrade Gammon to Buy.
IVRCL overtakes peers in sales with big leap in FY08 3
Profitability came under marginal pressure 3
Order inflow has been impressive in FY08 4
NHAI and industrial capex to drive FY09F order inflow 4
Steep increase in input costs leading to margin concerns 5
We adjust our EPS forecasts across the board 6
Trimming our subsidiary values to adjust for CMP or comparables 6
Maintain Buy for IVRCL and Nagarjuna, upgrade Gammon to Buy 7
S E C T O R D Y N A M I C S
Input prices: throwing a spanner in the works? 8
A steep increase in prices of key inputs and the ineffectiveness of inflation indices
could upset the apple cart for construction companies. Companies want star-rated
contracts, but questions remain regarding BOT...
Hefty increase in input costs; indices napping 8
Roads: need for speed 10
After a deluge of contract awards in FY06, there was a moderation in the two
subsequent years. However, with NHAI floating RFQs for more than 3,300kms
recently, the roads and highways sector seems back in action.
NHAI gearing up for large awards 10
Water and irrigation 12
A need to increase irrigated areas and cater to a growing urban population is
driving investments in water infrastructure. Water being a state subject, we focus
our attention on states that have taken the lead on this...
Thirsty for more 12
Urban infrastructure 14
Urban India, due to its large contribution to GDP, is occupying prime space on the
policy radar. Programmes such as JNNURM, which links central grants to local
level reforms, bode well for the urban infrastructure space.
Focus on urban areas – change in policy paradigm 14
Railways 16
After reaping the benefits of better utilisation, Indian Railways is banking on
aggressive capacity expansion to ride the next growth wave. We focus on an
ambitious dedicated freight corridor project and the opportunity...
C O M P A N Y P R O F I L E S
Company profiles 18
Gammon India 19
Hindustan Construction 29
IVRCL Infrastructures & Projects 37
Nagarjuna Construction 46

Enough order backlog to extend
visibility
Except for IVRCL, Tier 2 construction companies in our coverage universe
slipped on FY08 sales and PAT. Given building cost pressure, we cut our EPS
forecasts. IVRCL remains our top pick and we upgrade Gammon to Buy.
IVRCL overtakes peers in sales with big leap in FY08
With a robust 59% increase in sales in FY08 coupled with a consistent increase in
sales recorded within the past few years, IVRCL was able to overtake its peers to
emerge as the leader in sales in FY08. We expect it to widen its lead over FY09-10F
because its average order execution period is relatively low and it relies upon a
relatively higher proportion of subcontracting to increase its size. We believe
Nagarjuna Construction, which lost its leadership position in FY08, will continue to
challenge IVRCL in the coming years as Nagarjuna increases its exposure to the
industrial capex cycle. We believe HCC and Gammon, which are being selective in
types of orders, will lose their size advantage.