Buy the Capital Goods Sell Off – Glodman Sachs

Goldman Sachs Equity Analysts in a report released just a while ago on the Indian Capital Goods sector express the SELL-OFF has created an opportunity to BUY Capital Goods / Infrastructure stocks as the entry levels are attractive. We present to you mix of Goldman and Merill’s Views on select stocks for investment consideration.

The Indian infrastructure sector as we believe spending on this sector is increasing at a rapid pace, offering substantial asset growth opportunities. Execution has improved, but needs to improve further to achieve higher growth expectations.

IVRCL Infrastructure – Although the current political dispute in Andhra Pradesh (AP) is a key short-term challenge for the company, this will be offset by strong order inflows and execution. Excluding the L1 orders, the company’s order book currently stands at Rs175 bn. Expect IVRCL to register a sales CAGR of 26% over FY09-FY11E. Goldman expects IVRCL to report an EPS of Rs 16.8, 25 and 37 for FY10, 11 and 12. It has set a target price of Rs 477 based on Sum of the parts for IVRCL.

Jaiprakash Associates – In a quarter when most infrastructure companies, including L&T, have disappointed on the execution front, Jaiprakash Associates’ construction revenues were up 119% on a yoy basis. The cement division has also shown strong volume growth, with dispatches in both December and January up 60% yoy. On the power front, JP Power funding secured; execution pick-up, Largest hydro project secures CEA clearance. Expressway and realty monitization on-track.

Goldman expects JP Associates to report an EPS of Rs 5.28, 7.83 and 10.11 for FY10 , 11 and 12 with a target price of Rs 180.

Bofa-Merrill expects EPS of Rs 5.04, 5.74 and 6.80 for FY10 , 11 and 12 with a target price of Rs 200.

Larsent & Toubro For 9MFY10, while L&T’s order book has registered a 29% growth, sales over the same period have grown by just 1%, reflecting the execution challenges faced by the company since the beginning of FY10. The share of longer gestation power segment orders has risen from 22% at end-FY09 to 32% as of 9MFY10.

L&T currently trades at 20.2X FY11E EPS [Rs 71] which is a premium of 7% to its five-year median 12-month forward P/E of 18.8X and a 46% premium to its global peers. Goldman’s 12-month target price of Rs 1,450 with a Neutral rating.

However, BOFA-Merrill expects L&T to report an EPS of Rs 69.38 for FY11 with a higher target price of Rs 1,700.

IRB Infrastructure Developers – With 3,404 lane Kms under operation and 1,646 lane Kms under development, the company is one of the biggest road BOT operators in the country. In addition, it currently has about Rs36bn
and Rs200bn of projects in the Request for Proposal (RFP) and Request for Qualification (RFQ) stages, respectively. Expect sales CAGR of 33% over FY10E-12E for the company, and forecast EBIT margins to improve by 200 bps.

According to Goldman, IRB currently trades at FY11E P/E of 17.0X [EPS Rs 14.18] and  – slightly above its historical 12-month forward P/E of 17.2X. Goldman has set a 12 month target price of Rs 326.

Watch this Space for more coverage on GMR Infra, Punj Lloyd and other stocks.

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