The momentum of India’s infrastructure sector is going to accelerate and capital goods companies will be the major beneficiaries.
This can be seen from the increased number of projects as well as the burgeoning order books of most companies. The government has set a GDP growth target of 9% in its 11th Five-Year Plan.
With the economy now running at nearly full capacity utilisation, investments in capacity and asset expansion are crucial to achieve the desired GDP growth. The market is no longer factoring in one- or two-year forward growth, but rather looking at multi-year growth from the sector.
Some of the traditional concerns about the sector have been execution risks, order book momentum and the availability of funding for projects. The strong quarterly numbers point to execution momentum.
Companies have been able to hold on to operating leverage, despite rising material and manpower costs, indicating a benign pricing environment. We expect momentum to gather more steam going forward, and hence earnings surprises are likely to continue.
There has been a slew of funding announcements on the publicprivate partnership route. A lot of private equity funds are coming in to fill in the gap that exists for equity funding of projects. We continue to prefer large caps— Bhel and L&T. Among mid-caps, we like Thermax.
Bhel: We have raised our revenue estimates for Bhel on the back of the good earnings that the company has reported. We expect Bhel to perform substantially well in the coming quarters, due to a combination of better execution momentum and implicit volume growth coming out of capacity addition. We maintain our Outperformer rating with target price of Rs 3,117.
L&T: We have increased confidence in this company, given the fact that its management has increased its revenue guidance within six months. The company has shown a strong performance in the first half of the year, with revenue growing 39% and margins expanding by 310 basis points. We maintain our Outperformer rating with a target price of Rs 4,818.
Suzlon Energy: Suzlon had a tumultuous first half, with first quarter in the pits and the second quarter showing an extremely strong performance. This has again exemplified our view that if the order book and business environment is strong, companies can bounce back in subsequent quarters. We maintain our Outperformer rating with target price of Rs 2,386.
Thermax: Thermax continued its strong run in the first half of the year. The company reported 81% topline growth in the first half and saw its margins expand by 90 basis points. We expect the company to grow at 40% over 2008-9. We are bullish and maintain Outperformer rating with a discounted cash flow (DCF)-based target price of Rs 1,051.”
