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Last Updated : Nov 19, 2015 02:01 PM IST | Source: CNBC-TV18

Sentiment to turn +ve for L&T in H2; buy IRB: Macquaire

The government Wednesday authorised NHAI to pay compensation to road developers, in case of delays not attributable to them, a move that will significantly benefit 34 stuck projects.

The government on Wednesday authorised NHAI to pay compensation to road developers, in case of delays not attributable to them, a move that will significantly benefit 34 stuck projects.

Inderjeetsingh Bhatia, Macquarie Research in an interview to CNBC-TV18 spoke in detail about the impact of these developments on companies like Larsen and Toubro, IRB Infra etc.

Below is the verbatim transcript of Inderjeetsingh Bhatia's interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.

Sonia: The Modi government has set the ball rolling as far as the road and infrastructure segment is concerned by rebooting those 34 stuck road projects. How would you analyse this in terms of individual listed companies, who do you think the beneficiaries could be?

A: The road sector is one where I would say the government has shown the most amount of energy and enthusiasm to carry forward reforms, stuck projects, award more contracts and I would say be nimble in terms of moving away from a public-private-partnership (PPP) model to an engineering, procurement and construction (EPC) model just to get projects moving.

This is another initiative out of the number of steps that they have taken till now. I view it positively but I still think it is way too early to start thinking whether there would be certain companies or certain listed companies which will benefit more than others because the government has to now see what they can offer to these companies. I still suspect that some of the companies might want to look at compensation in terms of either cash compensation in the more near-term rather than just hope for a tolling extension because to be honest if you already have a tolling rights for 15 years and the government offers to make it 16-17 years, the cash flows are only going to come at the end of the tenure. So though it is a good initiative by the government, I would wait for some action on the ground before getting excited just by this step. However, it clearly, tells you about the intent of the government which is very positive.

Reema: What about a company like Larsen and Toubro (L&T)? It was in everyone's core portfolio because of expected domestic spending or a capex revival in India -- the expectations of that have only been getting advanced from one quarter to the other and consequently L&T's earnings have disappointed the street, where do you stand on L&T and what could be the earnings recovery in that stock in FY17?

A: Order inflow has been something which is obviously bogged down on L&T in this fiscal year. They said the expectations at 15 percent growth at the start of the year and they had to curtail their guidance down to 5-7 percent and now investors are asking a question whether they would be able to meet even that curtailed guidance. So everybody is hoping for a very strong recovery from them in second half.

We had L&T participate in our conference, they are also participating in some of the very big tenders coming up in the next six months in various infrastructure. Defence could be obviously a very big area for them hopefully in FY17. So I think it is very critical that L&T gets its success rate back in some of these big contracts. If that starts to happen and order inflow starts to recover in the second half, I will not be surprised if the sentiment on L&T changes significantly later in the year. However, the order inflow wins are going to be very critical there.

The second thing which I want to mention, which I believe that the market is slightly under-appreciating at this point of time is the L&T's management action on their balancesheet -- the L&T management is very aggressively looking to sell down assets over the next few quarters and they have already sold Dhamra Port, Kattupalli Port, they raised money in L&T Finance, they are looking to list out L&T Infotech. The balancesheet curtail and that would start to release a lot of capital for them and that would release a lot of earnings going into next year. So what we expect is that the company to come back to 20 percent kind of earnings growth from FY17 onwards, which I think market, would take up with both hands. So there are still a lot of apprehensions regarding that and that could surprise the market.

Sonia: What are the top recommendations that you have in the infrastructure space both from frontliners and from the broader markets?

A: Among the top picks, I would say if I would look at the largecaps, we will definitely like Larsen and Toubro (L&T). If I look at the midcap space across the sectors, Gujarat Pipavav port is something that we like in the asset owner side. In the construction side, we like NCC, among the capital goods companies Cummins India is one of our top picks and if I look at power sector, I would say National Thermal Power Corporation (NTPC) would definitely be one of our top picks there.

Reema: Considering that road is where the government has already taken a lot of initiatives and it still is, how would you look at IRB, the stock anyway has been on everyone's radar, a lot has been spoken about IRB being the beneficiary of the government's road reform agenda, is it still a buy at current levels?

A: I think so. I am excited about two things. One is obviously the road traffic which is increasing in a last few months that is a very healthy trend coming through. Second is some of these companies given they have a lot of commissioned assets, they would also benefit a lot from the interest rates coming down gradually in the system. What we believe is some of the better run companies will see bigger benefits of interest rates coming down rather than most leveraged companies because banks would be more willing to bet on the less risky companies.

Another very interesting thing, which is there with IRB is the management efforts to get the real estate investment trust (REIT) kind of a structure rolling. If the management is successful in attaining that we can see a very sharp rerating in IRB because that can make the company practically dilution free and allow it to pursue growth at a fairly aggressive rate. So with a lot of tailwind in the sector, IRB definitely would be one of our key picks in the space.


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First Published on Nov 19, 2015 11:54 am
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