Angel Broking handpicks 3 stocks from infra space

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Angel Broking handpicks 3 stocks from infra space

Angel Broking has come out with its report on infra space.

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IVRCL BSE | NSE 29/05/12 Are Mutual Funds betting on IVRCL? Other Stocks in this news NCC | Sadbhav Engineering | Larsen and Toubro |

Angel Broking has come out with its report on infra space.

Earnings marred by margin pressure and higher interest costs: For 4QFY2011, slippage on the earnings front (barring SEL, L&T, JAL and MPL) was due to 1) margin pressure (average dip of 170bp qoq for 10 companies considered for the analysis in this report) on account of high commodity prices and 2) spiraling interest cost. This resulted in disappointing earnings despite decent top-line growth.

Sector facing numerous headwinds: The construction sector is currently blemished by concerns: 1) Interest rates - No respite in sight: During the quarter, the RBI increased the repo rate by 50bp from 6.75% to 7.25%, with a similar increase in reverse repo rate from 5.75% to 6.25%. This steep increase in interest rates, aiming to kill inflation, would come at the cost of growth and is very well acknowledge by the RBI. We believe this was not the last round of hikes given inflation is expected to remain high and another steep hike is on the cards in the next RBI policy in June 2011; 2) Margins under pressure: The increase in commodity prices - cement (20%), steel (10%) and bitumen (15%) - in the last 3- 4 months has resulted in lower EBITDA margin across the sector. Further, the impact of this has aggravated with increasing share of captive orders (fixed price orders) in the order book of all companies along with increasing competitive pressures; and 3) Order awarding takes a backseat: There has been a considerable slowdown in order awarding activity across the infra sector on account of various factors (environment clearance, lack of stable leadership in various PSUs, state elections and land issues, among others). The only silver lining has been pick-up of awarding activity in the last couple of months from NHAI's end, although it is leading to intense competition and creating doubts over the profitability of these projects.

Valuations - Factor in macro headwinds faced by the sector, but remain selective: On account of cheaper valuations post the correction in construction stocks and taking into account the FY2013E earnings growth outlook, we remain positive on companies having 1) less dependence on capital markets for raising equity for funding projects (L&T and Sadbhav); 2) strong order book position (IVRCL and Sadbhav); 3) superior return ratios ( L&T and Sadbhav); 4) comfortable leverage position (L&T, NCC and Sadbhav ); and 5) inexpensive valuations ( IVRCL and NCC ). We maintain L&T, IVRCL and Sadbhav as our top picks.

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To read the full report click on the attachment