Infra not out of woods yet: Angel Broking

Angel Broking has come out with its report on infrastructure space. L&T and Sadbhav (SEL) are the top picks in the sector.

Revenue growth falters, subdued EBITDAM and high interest cost lead to muted earnings show: Infrastructure players (12 companies chosen for this analysis) have witnessed yoy average growth of 11.6% on the top-line front in 4QFY2012 against our estimate of 10.8%. Despite 4Q traditionally being the strongest quarter for infrastructure companies, we were expecting sluggish performance on the execution front given the headwinds faced by the sector. EBITDA margins for the quarter have broadly remained under pressure owing to higher input costs. High interest cost owing to enhanced debt levels and high interest rate regime continue to dent profitability. Owing to the above-mentioned reasons, earnings performance of companies was muted, at average yoy earnings growth coming at 7.3%, albeit higher than our estimate of 3.3%, mainly due to positive surprise from CCCL, JP Associates (JAL) and ITNL.

Road developers perform better: For our analysis, we have bifurcated companies into E&C companies and road developers to gauge the performance separately for both E&C companies and road developers. Road developers have outperformed E&C players (except L&T) on all fronts, continuing the historical trend in 4QFY2012 as well.

Interest cost continues to pinch; Order books at decent level provide revenue visibility: As witnessed in the past few quarters, high interest cost continues to blow a hole in the profitability of companies; however, rate cut by the RBI in April 2012 and another cut (25-50bp) expected in June 2012 would provide some relief to companies. Despite order inflow being dismal for the quarter, companies continue to have decent order books providing revenue visibility.

Outlook and valuation: Persistent headwinds faced by the industry – high interest rates, policy inaction and slower-than-anticipated revival in industrial capex continue to haunt the sector’s performance. Further, stretched balance sheet and working capital on the back of investment in subsidiaries and delays in payment from clients have aggravated the situation. However, infrastructure stocks have seen some positive movement during the past week as the Prime Minister has decided to give a push to infrastructure projects and emphasized on boosting investment in the sector along with hopes of interest rate cut. Battling charges of policy paralysis, the Prime Minister has set an investment target of at least `2lakh crores for core sector projects in FY2013. We believe that although interest rate cuts and increasing investment in the sector remain key triggers for infrastructure stocks, removal of bottlenecks like delays in environmental clearance and land-acquisition issues is also of prime importance for execution pace to pick up.

We prefer to remain selective: We believe that stock-specific approach would yield higher returns given the disparity among these companies and changing dynamics affecting them positively/negatively. Hence, we prefer companies having 1) comfortable leverage position; 2) superior return ratios and 3) less dependence on capital markets for raising equity for funding projects. Hence, we recommend L&T and Sadbhav (SEL) as our top picks in the sector.

Public holding more than 90% in Indian cos

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