[T.S.R:17106] Nomura: Downgrading Infrastructure, The Future Is Not Comforting

Nomura

India Infrastructure-Downgrade HCC, Punj Lloyd; Lower Target for IVRCL, NCC

We are alarmed by the policy inaction regarding infrastructure. There is clear foot dragging where it concerns release of orders, and finances and payments ease up liquidity of Infrastructure companies. The current phase is the most disturbing and disappointing ever since the PPP route was taken for Infra projects a decade ago. 

Macro headwinds impacting financials 

Delays in policy decisions and higher interest costs have adversely impacted order inflows for FY11. Companies in our coverage universe are likely to report 5-40% slippage on initial guidance. We find a pick-up in execution in most cases since 3Q FY11. However, growth rates are unlikely to go beyond 20% due to disappointment in order inflows. For our coverage universe, we estimate revenue growth at 7-16% for FY12F. Slower revenue growth and rising overhead could put downward pressure on margins. Further, increase in leverage (due to rising working capital on non payment of dues) and interest rates is adversely impacting bottom-line growth. 

Unfortunately the near future is not comforting

We remain cautious on the macro outlook in the near term. With imminent state elections and a possible cabinet reshuffle, the policy environment and decision making is unlikely to improve, in our view. Inflation is likely to remain at elevated levels due to high commodity prices. Clearly the interest rate environment is expected to remain hawkish. Nomura economics team expects another 50bp rate hike through FY12 over and above a 200bp increase over the past 12 months. 

Turning more selective

We incorporate the impact of slow order intake, higher interest cost and lower margins. For mid-tier construction companies, we lower core EBITDA by 9-76% for FY12F. With limited visibility on resolution of macro issues, we turn selective and prefer companies with relatively strong balance sheet and execution visibility. We retain our BUY on NJCC (top pick) and IVRCL, as current valuations don't factor in long-term revival, in our view. We downgrade HCC to NEUTRAL on a weak balance sheet and Punj to REDUCE on poor execution visibility. 
 

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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