Construction & Eng
Infrastructure thrust
With clear mandate following its re-election, we feel the central government can
expand infrastructure spending by doubling its contribution to 35% of total
spending. This should benefit Nagarjuna and IVRCL, which have healthy balance
sheets. Sell HCC and Gammon on dilution overhang and their slow sales pace.
Current valuation summary for construction sector peers
Company Current
Price
Adj.
CMP EPS (Rs.)
P/E(x) adj.
sub. value
Earning
CAGR
Target
Price
Upside/
(Downside) ROE
Rs Rs FY10F FY11F FY10F FY11F FY09-11F Rs FY09F
IVRCL Buy 304.05 270.9 22.7 30.7 11.9 8.8 36.4% 468.1 37.7% 13.3%
Nagarjuna Const Buy 132.4 101.4 8.6 10.9 11.8 9.3 28.7% 162.3 22.6% 9.4%
Gammon India Sell 165.7 90.5 4.5 5.7 20.2 15.8 31.9% 121.2 -26.9% 2.7%
Hindustan Const Sell 116.90 84.9 3.6 4.5 23.4 18.9 22.3% 76.8 -34.3% 7.8%
Note: CMP adjusted for subsidiary value of Rs75.4 for Gammon, Rs32 for Hindustan, Rs69.2 for IVRCL and Rs31 for Nagarjuna
Closing prices on 9 June 2009
Source: Bloomberg, ABN AMRO
Central government to boost total infrastructure spending
Total government tender values have risen at an FY03-09 CAGR of 20%, even though the
central government’s (Centre’s) share in overall spending pie has shrunk to less than 20% in
FY09 (year-end March). With the Congress party at the helm and holding a majority, we see
greater scope for increased infrastructure spending in areas such as roads, railways, ports
and power transmission. We estimate Centre’s aggression will expand the total infrastructure
basket and double its share to around 35% of the national total (last seen during the BJP’s
reign). Funding support from IIFCL (India Infrastructure Finance Company) and easy liquidity
should help. We believe IVRCL will gain the most from the recent re-election of the Congress
government in Andhra Pradesh, which has announced a doubling of the irrigation budget.
IVRCL stands to benefit the most, in our view
IVRCL is the only company in our Indian infrastructure coverage to have maintained high sales
growth (22.7%) and to meet our FY09 expectations in the tough economic environment since
September 2008. Others in the sector have seen slippages (only 0-5% sales growth). Debt-toequity
for HCC and Gammon are high (more than 2:1), on our estimates, as they were among
the first to tap equity to raise funds at the cost of dilution. We estimate debt-to-equity for IVRCL
and Nagarjuna at 75%. We believe both should have comfortable liquidity, as we expect them
to have scope to securitise BOT road projects in the coming quarters.
Buy IVRCL and Nagarjuna; Sell HCC and Gammon India
In our view, IVRCL and Nagarjuna are well placed to benefit from renewed infrastructure
initiatives by both the central and Andhra Pradesh governments, given their low debt-toequity
and maturing BOT portfolios. We think they can regain the sales momentum achieved
in FY03-08 and even scale new peaks by leveraging their skills in new areas of work. We roll
forward our target PEs to FY11F, factor in the sharp appreciation in the share prices of listed
subsidiaries and raise our target prices. We maintain our Sell calls on HCC and Gammon on
what we see as stretched balance sheets, weak ROEs and exposure to long-gestation
projects that should limit their momentum vs peers. We remain concerned about significant
dilution, though the improved liquidity situation has alleviated much of the pressure on
balance sheets and reduced interest costs (2-6% of net sales for HCC and Gammon).
Contents
All eyes on central government policy 3
We believe IVRCL and Nagarjuna should benefit most from the re-election of the
Congress-led government, given the administration’s infrastructure drive in areas
such as transportation and power transmission. However, implementation remains
key.
3
Infrastructure spending should 3
Highway construction awards may see the light of day 5
Company profiles 12
IVRCL Infra & Projects 13
Nagarjuna Construction 21
Gammon India 29
Hindustan Construction 36