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Sector scenario: Feeding growth

Sector scenario: Feeding growth

The government’s thrust on infrastructure development has triggered major investments in the core sectors of power, mining, transport, etc.

The government’s thrust on infrastructure development has triggered major investments in the core sectors of power, mining, transport, etc. The deluge of investment augurs well for the material, handling and equipment (MHE) industry and translates into a huge opportunity for supply of critical equipment, systems and packages.Powering ahead

The industry will gain from robust demand for its products like bulk material handling plants, mineral processing plants, container cranes, bulk material cranes and stores and spares.

The MHE industry is sitting on windfall opportunity of Rs 1,18,900 crore between 2007-8 and 2013-14. We believe the steel industry will contribute the highest at Rs 62,300 crore, whereas power is likely to contribute Rs 27,200 crore.

Other segments such as minerals and ports will make meaningful contributions of Rs 16,900 crore and Rs 12,500 crore.

Companies armed with strong engineering skills, coupled with domain knowledge and proven execution skills are likely to be the key beneficiaries of this major opportunity. We are very bullish on the growth prospects of the MHE industry and initiate buy rating on Mcnally Bharat and TRF and an accumulate rating on Elecon Engineering Company.

Mcnally Bharat Engineering Company: The company’s Rs 1,120 crore order book is an indicator of the immense opportunity that lies ahead. Moreover, with almost 63% of the order book comprising high-margin steel and mineral verticals, MBE is likely to see a healthier revenue mix as well as better margins in the future. We expect earnings per share (EPS) of Rs 9.50 in 2007-8 and Rs 17.30 in 2008-9.

The stock trades at an attractive valuation of 11.8 times the estimated EPS for 2008-9. We initiate coverage on the stock with a buy rating and price target of Rs 255.

TRF: The company is sitting on a healthy order book of Rs 500 crore which is 1.5 times its 2006-7 revenues. TRF is likely to report a healthy CAGR in earnings at 61.6% and expected earnings of Rs 60.5 and Rs 94.5 in 2007-8 and 2008-9 respectively.

The stock trades at an attractive valuation of 11.3 times 2008-9 estimated earnings. We initiate coverage with a buy rating and a target of Rs 1,500.

Elecon Engineering Company: The company has a strong presence in the power vertical and is a market leader in industrial gears. The immense opportunity in the MHE industry is likely to drive EEL’s growth. We are bullish on EEL, given the strong growth prospects in the existing business and high potential in its new ventures.

The company is likely to report a healthy 62% CAGR in earnings with an EPS of Rs 25.3 in 2007-8 and Rs 46.7 in 2008-9. The stock trades at an attractive valuation of 13.8 times 2008-9 estimated earnings. We initiate coverage with an accumulate rating and price target of Rs 700.