We estimate our construction coverage universe (excluding Jaiprakash Associates Ltd) to report 32% earnings compounded annual growth rate (CAGR) over FY09-12, driven by India’s huge infrastructure spending, better credit availability and leaner balance sheets. The massive infrastructure spending is likely to lead to a scale change in order inflows over the next 12-18 months.
India’s infrastructure spending will rise from 6.5% of gross domestic product (GDP) in FY09 to 9.3% by FY12. Almost half the investments would be in power and roads—construction orders for over 100GW (Rs1.1 trillion) and 36,000km (Rs2.6 trillion) over the next 24-30 months are expected. Over the next 15 months, we expect orders worth Rs50,000 crore and Rs1.6 trillion from power and roads, respectively.
Graphics: Ahmed Raza Khan / Mint
We expect our coverage stocks (excluding Jaiprakash Associates) to record earnings CAGR of 32% over FY09-12 on the back of stable operating margins and strong revenue growth. Despite a higher base (40% CAGR over FY06-09), we expect revenue to grow at around 25% CAGR over FY09-12. Stronger balance sheets (led by availability of equity capital) are enabling construction companies to bid for larger orders. Focus on core competency is reducing the risk perception.
Keeping the above in mind, our top picks from the sector are Jaiprakash Associates and Nagarjuna Construction Co. Ltd.
We recommend buy on Jaiprakash Associates. A leader in infrastructure, Jaiprakash Associates’ assets, by March 2012, would include 33 million tonnes cement capacity, 2,200MW power, 400 million sq. ft property, and operational/under-construction expressways (Yamuna, Ganga, Himalayan).
We estimate the parent would report FY09-12 revenue and profit CAGRs of 27% and 22%, respectively, led by the cement and construction divisions.
Jaiprakash’s advantage of low land cost (Rs70 per sq. ft) enables it to competitively price products at its Noida project, part of the Yamuna Expressway. Therefore, we estimate a profit before interest and tax CAGR of 58% over FY09-12.
Nagarjuna Construction’s strong order book position, focus on core operations (cash contracts, road build-operate-transfer, or BOT, projects), 33% earnings CAGR over FY09-12 and attractive valuations make it the top pick in our coverage universe. So, we recommend a buy.
We expect Nagarjuna’s order inflow momentum to continue. The consolidated order book of Rs16,100 crore (3.4x FY09 revenue) encompasses the major verticals—buildings, irrigation, water, oil and gas, metals, power and roads.
Nagarjuna has also refocused on core strengths: cash-contracts and road BOT projects. It shelved two airport projects, capped further property investments and sold its stake in Gautami Power.