Greshma Macro Trends

Infrastructure Sector

India Infrastructure
Turnaround times Time to log in

June 13, 2011

Infrastructure Sector Stock Index

Script IVRCL ltd. CMP (`) 75 Our View Positive Target Price (`) 96 Time Horizon 1 year Investor Rationale Strong order backlog at `238 bn (4.2x FY11) Order backlog of `117 bn. Management guidance of `4555 bn of new projects. Strong order book, large bid pipeline, global player. Signs of early recovery, strong order backlog of `228 bn. Company to foray into railways. Green field capacity expansion and entry into merchant power. Real Estate business to augur near term growth. Strong revenue growth expected till 2014 due to expansion. Long term agreement for raw material. Turnaround led by Indian operations

IRB Infra

165

Positive

185

1 year

IL&FS Transportation Punj Lloyd

202

Positive

251

1 year

65

Positive

82

1 year

CESC

289

Positive

369

1 year

Patel Engg.

156

Positive

198

1 year

Adani Power

108

Positive

124

1 year

Suzlon

51.8

Positive

60

1 year

June 13, 2011

Infrastructure Sector

Sector: Infrastructure
If there is one reason to invest in India, it has to be for growth. Those who believe in the long-term India story must necessarily have to look at sectors which will be the engine of our growth and at stocks that offer significant value. The Infrastructure sector remains to be the main focus for the government as it has received 46% of total planned allocation in this years budget with a provision of `1,73,552 crs for upgrading infrastructure in both rural and urban areas. Major emphasis has been given to development of high quality physical infrastructure such as roads, ports, airports and railways. Yes,there are many issues slow pace of infrastructure developmet, rising input costs, high financing costs and general levels of transparency in a sector, which is largely unregulated. Over the last 2 years or so, infrastructure stocks have largely been out of favour and prices have been beaten [Link] the RBI raising interest rates six times in the last one year, these companies are clearly facing tough times due to higher interest rates hitting profitability of the various infra companies. Despite so many rate hikes, the RBI is likely to have at least one if not two more rounds of rate hikes. Volatile and fairly benign equity markets have also meant that times are not appropriate for these companies, which are characterized by high financial leverage, for raising long term funding in the form of equity. Consequently, debt equity ratios and financial expenses have both moved sharply northward. Given the widespread focus on infrastructure by various categories of investors, competition is intense for all major projects. This means infrastructure companies work on thin margins with limited scope for adjustment or tolerance for overruns. We have already seen percentage of interest cost of the total sales increasing to 8.97% The operating margins have reduced from Higher commodity prices havent helped either rising costs have put an additional burden on these companies have come down to 20.4%.We have seen surge in all major cost inputs like coal, steel, fuel and iron etc in last one year due to asset bubble globally . Elections in various states, regulatory activism, various political events, corruption allegations and inadequate land acquisition measures have led to a slowing down of fresh orders. Most companies barring Larsen & Toubro, were victims of this slow down. Monetary tightening in last 6-8 months have also meant delays in financial closure for many key projects as the parameters of financing have changed significantly. The lack of single window clearance have put various projects on hold at this time. So much for the bad news. The good news is that all these are known factors and have been discounted by the market as reflected in the south bound prices of infrastructure stocks in general. Further monetary tightening of up to 50 basis points by the RBI is practically a foregone conclusion for most market participants with many believing 75-100 basis points may be the eventual rise in interest rates. Our view, as has been reiterated in our publication Greshma Excel, June edition, is that interest rate hikes of 50-75 basis points may, in fact, signal the end of the current tightening cycle and this is a huge plus for equity markets in general and infra stocks in particular. One must, of course, pick stocks carefully to avoid falling into a low price trap. Relatively low leverage, strong balance sheets, ability to re-price contracts with escalation clauses and, most importantly, ability to execute projects without significant time overruns are major considerations in picking infra stocks. Some infra stocks are quoting below their book value due to legal suits and enquiries going on against these companies if they do get favourable outcomes in these legal enquiries and wrangles, one could see a major upward move in these stocks even if the current inflationary environment were to continue. We now look at some of the sub sectors and stocks within this broad sector.

June 13, 2011

Infrastructure Sector
Housing
The Government has plans to introduce 50 million homes in the affordable segment. Housing, particularly affordable housing, will always be in short supply in India. The Governments focus will provide an opportunity for companies in the Housing sector. We are expecting this will drive growth of construction sector in the next 24-36 months, once the formal announcement is made by the higher authorities. However, the plan remains opaque in terms of share of central and state government and regulatory hurdles for the implementation. We like HDIL, Oberai Real estate and Sobha Developers among listed players. We like HDIL due to its presence in SRA segment, Oberai Real estate due to its strong balance sheet and highest margins and Sobha developers due to its strong presence in southern region. We also like DLF due its strong portfolio and highly diversified assets however debt will remain a concerns in near term.

Power Sector
In power sector, we are facing severe crunch of power and this shortage is due to mismatch of demand supply , transmission and distribution losses and power theft. The government policy is also one of the reason India is the world's fifth largest generator of power with an installed capacity of 159GW. Fossil fuels are the primary source of energy for 64.3% of this generation; among fossil fuels, coal has 82.2% share, i.e. approximately 84.2 GW of power generation in India uses coal as the energy source. Hydro-electricity is India's second largest source for power, contributing 23.1% (36.8 GW) of the total power mix. Though nuclear power has started gaining ground as an alternative fuel source, barely 4,560 MW of nuclear power is generated - contributing 2.9% to India's total power generation. Nevertheless, post the recent fears of a nuclear leak in Japan, nuclear power as a major source is expected to vane as India becomes more environment and safety conscious. Suzlon can be bought at current level as we expect company has already in process of turnaround due to growth from domestic segment. The Indian market now contributes a significant proportion (about 60%) of the total order book of the company versus only 20% of the backlog at the end of FY2010. USA, which contributed to 24% of the order book at end-FY2010, now contributes to just 11% of the current order book. We are expecting good orders from Brazil in Fy12.

June 13, 2011

Infrastructure Sector

Power generation capacity by fuel source Table 1: Power Generation in India: 2009-10: By Fuel Source Fuel Coal Gas Diesel Sub-total Thermal Nuclear Hydro Others Total Source: Central Electricity Authority, March 2010 India's per capita annual power consumption, at 704 kWh, however, compares unfavorably with other developed and emerging economies. The US leads per capita consumption at around15,000 kWh; China (with a population greater than India) has a consumption of around 1,800kWh - approximately two and a half times that of India. During the period April 2009 to March 2010, the all-India peak demand for power was 119,166 MW of power - whereas the actual power met was 104,009 MW - a shortfall of 12.7%.This all-India average, however, hides glaring fluctuations within regions (Table 2). Table 2: Power Demand and Deficit: 2009-10 Region Northern Western Southern Peak Demand (MW) 37,159 39,609 32,178 Peak Met (MW) 31,439 32,586 29,049 Deficit (5,720) (7,023) (3,129) Deficit % (15.4%) (17.7%) (9.7%) MW 84,198 17,056 1,200 102,454 4,560 36,863 15,521 159,398 % share 52.8% 10.7% 0.8% 64.3% 2.9% 23.1% 9.7% 100%

June 13, 2011

Infrastructure Sector
Eastern North-Eastern All India 13,220 1,760 119,166 12,384 1,445 104,009 (836) (315) (15,157) (6.3%) (17.9%) (12.7%)

Sources: Ministry of Power; Central Electricity Authority

In India, transmission of power is done generally through transmission lines of 132kV, 220 kV, 400 kV, 765kV AC and + 500 kV HVDC. With a view to augment transmission capacity, the Ministry of Power plans to set up a National Power Grid by 2012, with approximately 200,000 MW of generation capacity and consequent increases in transmission capacity. In 2009-10, the target was to augment the transmission network by a further 17,573 circuit kilometres (ckm); however, a total of 13,721 ckm was achieved (Table 3). Table 3: Transmission Lines in Circuit Kilometres: 2009-10 Transmission Lines 220 kV 400 kV 500 kV HVDC Target 7,113 9,548 280 Achieved 5,139 7,857 280

June 13, 2011

Infrastructure Sector
765 kV Total 632 17,573 445 13,721

Source: Ministry of Power If India is to achieve double digit growth over the next few years, ramping up India's power infrastructure is of utmost importance. According to CRISIL Research estimates, about `750,000crs is likely to be invested in the power sector by 2013-14, of which `480,000crs expected to be invested in power generation. This quantum of investment can only take place with large scale private sector participation in this business. It is expected that nearly half of these investments would have to emanate from private power players, thus giving rise to new opportunities for growth.

Road and Highways Segment

Allocation of `40 billion towards the development of rural roads is in line with previous budgets with `99.9 billion for planned spending on national highways. Though allocations for the roads and highways sector have been provided, implementation may be slow due to policy ambiguity at the state and central government levels and delays on account of land acquisition. The refinance facility provided by IIFCL to banks will improve the credit availability for infrastructure projects such as BOT road projects undertaken by the private sector and facilitate in achieving financial closure for projects After a slowdown witnessed in last two years, We are expecting FY12 to be better with the NHAI expected to award projects of more than 13500crs in next two years. There has been slow down in the sector with the issues like land acquisition, political interferences and environment clearances. We are positive on the sector given the near-term opportunity of US$37bn and steps taken by the government to ease execution risk. We prefer companies that have an established record in the sector, strong financial position, better corporate governance, experienced project evaluation team and good execution track record.

June 13, 2011

Infrastructure Sector

New orders from NHAI: We expect the NHAI to announce 6,000km in FY12E and 7,500km in FY13E. We are expecting activity to pick up ahead of schedule 2014 elections. The NHAI has eased norms from the earlier project-specific qualification to annual pre-qualification. This move would enable faster project awards by 2-3 months. Intensifying Competition to hurt margins: Aggressive project bidding has been observed in recent project awards by NHAI. This, coupled with already existing land acquisition, environmental clearances and other regulatory complications, could impact execution and project returns.

Positive outlook by government : Moves like accepting the recommendation of BK Chaturvedi report and implementing State Support Agreement (SSA) for smooth execution would mitigate execution risks. Further, robust CV growth would ensure traffic for toll-based stretches, comforting traffic volume estimates.

Road expenditure to increase: Indian road sector presents a US$37bn opportunity for private players in the next 3-4 years. 79% of projects undertaken in the National Highway Development Project (NHDP) are on a Public Private Partnership (PPP) basis. National and state highways would contribute US$27bn and US$10bn, respectively.

June 13, 2011

Infrastructure Sector

Water Segment
Orders are flowing for water and waste water treatment industry and the Indian water treatment industry is estimated to be about `20 Bn and growing at 15 to 20 % annually including the `12 Bn industrial water treatment sector and `8 Bn point of consumption market which involves localized water treatment. The water industry size in India is about `60 bn and the industrial water and waste water treatment market size would be around `30 bn and the drinking water purification market would total around `20 bn. The growth rates in the last 3 years have hovered in the vicinity of 18-20 percent. The global market would be about $ 50 bn. Good Water management is crucial to overcome the water crisis that threatens our country. We must create an infrastructure that ensures sustainable water supply for the countrys agricultural, industrial and domestic use. In the segment we like pratibha industries and Watech wabag. IVRCL Infra also

have some presence in the segment.

Port Sector
With 12 major ports and 187 minor ports, 7,517 km long Indian coastline plays a pivotal role in the maritime transport helping in the international trade. Traffic handled at major ports during April 2008 to January 2009 is recorded to be 436686 units. The ports in India offer tremendous scope for international maritime transport both for passenger and cargo handling. The Government of India targets to increasing the cargo handling capacity of major ports by two folds to reach 1.5 billion metric tons by the year 2012. Further, 111 shipping and inland water transport projects entailing an investment of `400 billion are expected to be completed by 2025. With such tremendous potential in this sector, we expect companies like Mundra Port, GPPL and Dredging Corp to do well and advice investors to accumulate the stocks at current levels.

Railways
We are expecting Railways Western and Eastern Dedicated Freight Corridors (DFC) must be completed by the end of the Twelfth Plan. The High Speed Rail link between Delhi-Mumbai and Delhi-Kolkata in the Twelfth Five Year Plan to provide faster connectivity between key cities. We expect companies like Concor, GDL and BEML to benefit by this development. We are also expecting more PPP in railways and state highways to complement government investment and possibility of joint network is also possible. A strong rail network is required to complement country growth and we are expecting enhancement of the linkages between the ports and the existing road and rail network, we expect Increase in bulk and

June 13, 2011

Infrastructure Sector
container capacity of the country by 30% in FY12. We also expect Metros in urban areas through PPPs wherever feasible. Reliance Infra and Larsen and Toubro are already doing projects via PPP in Mumbai and Hyderabad respectively.

Oil and Gas sector

The deregulation of the oil and gas sector has opened up new investments across the upstream and downstream segments. While exploration and production activity is on the rise, transport infrastructure and storage facilities for oil and gas are a must to meet energy needs of our economy. India has natural gas resources and the country's gas production is expected at around 44 billion cubic meter (BCM) per annum by 201112 and 54 BCM by 2014-15 from current level of 8 BCM per annum. The construction of pipelines for gas is also proceeding at a fast clip. The government is planning to set up a national gas highway authority to develop pipeline infrastructure in the country. The ministry is targeting a natural gas pipeline networks to 40-50 km per thousand sq km from the current 3.29 km per thousand square km. We like Oil India, Cairn India,ONGC, Aban offshore and Selan Exploration in the sector.

June 13, 2011

10

Infrastructure Sector
Patel Engineering Ltd. Q4 Result Update
The real income boost was from the real estate and its core business of C&EPC business was not able to deliver the desired [Link] reported a top line growth of 33% YoY for Q4FY11 but bottom-line dipped by 50%YoY, due to lower operating profit at 8.1% vs. 12.6% in Q4FY10. Reported PAT declined by 34% for the quarter. During the quarter interest cost jumped by 58% YoY to `728mn, which includes interest cost of ~`250mn towards its Noida real estate project.

Outlook:
The company holds 1150 acre of land across India which is likely to be growth driver for the company in near term. The company is planning to utilize its land by foraying into reality IT parks and SEZs. The companys current order book is close to 11000cr including L1 bidder. Phase II, III of Smondoville and service apartments are nearly sold out. In Mumbai, PEL has sold out the 80,000 sq. ft. Jogeshwari property for `76cr to Milestone Fund and has booked PBT of `45cr during the quarter. Hydro Business consists of 45% & Irrigation consists of 40% while the remaining 15% is likely in transportation and urban infrastructure business .The last year lost one major project when one of its clients had cancelled Loharinag Pal project. The company has already claimed 200cr against cancellation. The Company is setting up 13-20Mw power plant in Nagapattinam in Tamil Nadu & 90Mw at Gongri at Arunachal Pradesh. We are expecting work to commence in FY12.

Financials:
PARTICULARS Crores Net Sales Growth YoY Operating Profit OPM Adjusted PAT EPS in Mar-10 3,190.9 29.1 568.3 17.8 550.47 28.33 Mar-11 3,499.3 9.7 503.2 14.4 488.86 18.40 Mar-12 E 3,569.3 2.0 521.1 14.6 506.52 21.95 Mar-13 E 3,747.8 5.0 578.7 15.4 563.21 24.86

June 13, 2011

11

Infrastructure Sector
Valuations:
The stock is currently trading at 6.43X of its FY13 estimated EPS of 24.86,we value the stock at 8.0X it FY13 earnings. We are expecting C&EPC business to revive in second half of FY12 & we are anticipating the real estate business to shield slow down in C&EPC business in near term. The company is currently trading at 0.78Xits FY11 BV of `204 .At current valuation PEL is one of the most attractive bets in Infrastructure sector despite concerns about higher interest rates, slow down in fresh intake orders and delay in execution of these orders. We advice the investors to accumulate the stock at current level with the price target of `198 which is an upside of 23%.

June 13, 2011

12

Infrastructure Sector
IL&FS Transportation Networks Ltd Company Profile
IL&FS Transportation Networks Limited (ITNL) is an India-based surface transportation infrastructure company. The Company is a builder, operator and transfer (BOT) road operator, engaged in developing, designing, operating, maintaining and facilitating surface transportation infrastructure projects, taking projects from conceptualization to commissioning to operations and maintenance. ITNLs service offerings include advisory and management services, supervisory services (including as lenders engineers), operation and maintenance services, toll collection services for toll road projects and rendering assistance to applicant for toll road concessions with the bidding process. It is involved in the development, operation and maintenance of national and state highways, roads, including urban roads, flyovers and bridges in Andhra Pradesh, Delhi, Gujarat, Maharashtra, Karnataka, Uttar Pradesh, Kerala and Rajasthan.

Q4 FY11 Result Highlights

The Net income increased by 68% from `2413.11 crs to `4048.8crs on a yoy basis, whereas expenditure rose by 77% from `1669.07 crs to `2955.33 crs . EBITDA grew by 44% from `804.35 crs to `1154.89 crs, whereas the EBITDA margin saw a drop of 14% on a YoY basis. The PAT grew by 33% on a YoY basis from `338.31 crs to `449.74 crs.

Investment Rationale
Order book of `92.9bn As on Mar 31, 2011, ITNL had an order book of `92 bn. In addition, two projects where the company has emerged as L1 bidder have capital worth ~`16.6bn to be executed. ~72% of the order book comprises NHAI projects and ~43% of the order book is to be executed in the state of Jammu & Kashmir. Large bid pipeline The company has submitted RFPs for 1,451km of projects with an aggregate value of ~`104bn. This indicates large pipeline of projects for the coming years. IL&FS Transportation Ltd expects fresh orders worth 40 billion rupees in FY12, as it hopes to win at least 200-300 km of road projects this year. The National Highways Authority of India (NHAI) had announced it will call bids for 6000 km of road projects in FY 2012E and some of these will go the way of IL&FS. Outlook to Expand ITNL is bidding for projects in the Middle East, Africa, Commonwealth of Independent States and East European nations. Elsamex, the companys wholly owned unit, is scouting for road maintenance contracts in the Middle East.

June 13, 2011

13

Infrastructure Sector
Strong performance by European Subsidies Elsamex, the Spanish subsidiary has reported decent set of numbers for the year ended 2010. Revenues stood almost flat at Euro 160 mn whereas PAT witnessed a growth of 10% to Euro 4 mn. We expect Elsamex to continue is performance despite of concerns in Europe. Strong Management We expect the stock should trade at a premium due to Co-operate governance and one of the best management in the sector.

Outlook
We are positive on ITNL and expect companys revenue growth of 19.8% for fy12. We are expecting company to post an EPS of `25.1. We expect company to show strong performance from its road business as revenues from its four projects ((Moradabad-Bareilly,Pune-Sholapur,GurgaonMetro,Jorbat-Shillong) already started commencing in FY12 while revenue from two of its projects is likely to be commenced from [Link] are valuing 10x on its FY12 eps of ` 25.1 and recommended investors to buy the stock with the price target of `251 in one year

Concerns
High cost of interest-One of the main concerns is the high cost of interest which we predict should l continue to rise by 30% for FY2012. Their debt is also going to rise by another `30 bn from the current `54.67 bn, financing this will also drive the cost of interest.

June 13, 2011

14

Infrastructure Sector
Financial Summary
Particulars (Figures in ` Mn) Income Expenditure (Increase)/Decrease in Stock Consumption of Raw Materials Purchase of traded goods Employee cost construction Cost Fees for Technical services Operation and Maintenance Other Expenditure Total Expenditure Depreciation EBITA EBITDA Margin Other Income PBIT Interest PBT Tax Expense PAT EPS 86.5 643.9 31.5 3565.1 5277.6 301.8 3762.3 2418.9 16087.6 603.1 8043.5 33.33% 741.5 8181.9 2940.9 5241 1859.7 3383.1 19.97 -106.5 1358.9 117.9 3521.6 17896.5 382.8 3322.3 2445.6 28939.1 614.2 11548.9 28.52% 785.7 11720.4 4980.6 6739.8 2242.5 4494.4 22.19 -223% 111% 274% -1% 239% 27% -12% 1% 80% 2% 44% -14% 6% 43% 69% 29% 21% 33% 11% 45 1529.3 1529.3 3556.8 19686.1 482.3 3542.3 2519 32890.1 638.7 15290.6 31.74% 848.6 15500.5 6474.8 9025.7 3159 5866.7 25.1 -142% 13% 1% 10% 26% 7% 3% 14% 4% 32% 11% 8% 32% 30% 34% 41% 31% 13% FY 2010 24131.1 FY 2011 40488.0 % YoY Change 68% FY 2012E 48180.7 % YoY Change 19%

June 13, 2011

15

Infrastructure Sector
CESC Company Profile
CESC Ltd generates and distributes electricity within the licensed area of 567 Sq. Km. in Kolkata and Hawrah serving 2.3 million consumers which includes domestic, industrial and commercial users. The company owns and operates four thermal power plants generating 1225 MW of power. These are Budge Generating Station (750 MW), Southern Generating Station (135 MW), Titagarh Generating Station (240 MW) and New Cossipore Generating Station (100 MW). The company is in the process of setting up by 7000 MW of fresh Greenfield capacity in the next 6 years taking its capacity from the current 1225 MW to 8225 MW.

Investment Rationale
Greenfield capacity expansion by 7000MW and entry into Merchant Power The company expects to increase its power generation capacity from 1,225 MW currently to 8,225 MW in the next 6-7 years. We expect the company will manage to reach 4,985 MW by 2015. The third unit of 250 MW Budge power plant has started operations in Q3FY10. The company has achieved financial closure on Chandrapur and Haldia plants of 600 MW each and these are expected to commission by 2013 and 2014 respectively. With the expansion of capacities at Haldia, Chandrapur, Dhenkanal, Dhumka and Pirpainti, the company will enter Merchant Power sale which would lead to improved profitability in future. Revaluation through expected stake sale in Spencers Retail The company is open to the idea of selling minority stake in Spencers Retail if it finds a suitable value proposition, which would lead to revaluation of the company. Also the company expects to increase retail space by 2 lakhs sq ft from the current 9.69 lakhs sq ft by 2012. The company has cut costs, focused on improving bottom line and is stepping up earnings from private labels. Though Spencers Retail is a drag on the company currently; it is expected to achieve breakeven by 2015. According to the management, Spencers Retail needs to add 7 lakhs sq ft of area to reach breakeven point which it expects to achieve by 2015.

Operational efficiency The company has a Composite PLF of 92.61% in FY10. Currently Southern Generation unit is at (102.97%). Titagarh and Budge Budge are at 96.34% and 93.52% respectively. The composite PLF of 92.61% is well above the national average of 80%. This was achieved through measures like full utilization of designed limit, benchmarking with top class power plants, integrated operation and maintenance planning.

June 13, 2011

16

Infrastructure Sector
Huge cash position in books The company has cash position of `11 bn in books which means that it can raise further debt if required. The capex can be funded through surplus cash from the power business. The company has recently picked up a stake in Australian mining company for the valuation of 10 million dollars.

Outlook
We have valued CESC based on SOTP methodology. With huge expansion plans, and transmission & distribution network in place and with coal mine linkages for most of the projects in place, the company expects to grow at a CAGR of 11% over the next 2 years. Valuation based on EV/MW for its existing business, we get a value of `200per share. For 600 MW plants at Chandrapur and Haldia (expected be to commissioned by FY14) have been valued using EV/MW we get Equity value of `4590 mn (51% stake of CESC) for Chandrapur plant and a value of `9000 mn (100% stake) for Haldia plant, arriving at a value of `36.5 and `71.7 per share respectively. For Real Estate business with area of 69 acres we get value of `3032 mn to arrive at per share value of `24. Spencers Retail is valued based on MCap to sales of 0.4x which is at a discount as compared to its peers. We arrive at Mcap of `4540 mn which gives us value per share of `36. We recommend BUY on the stock with a price target of `369.

June 13, 2011

17

Infrastructure Sector
Punj Llyod Ltd Company Profile
The Punj Lloyd Group is a diversified international conglomerate offering EPC services in Energy and Infrastructure along with engineering and manufacturing capabilities in the Defence sector. Known for its capabilities in delivering mega projects on time, thereby ensuring repeat customers, the Group possesses a rich experience of successfully delivered projects across the globe, while maintaining the highest standards of health, safety, environment and quality (HSEQ).

Result update
Punj Lloyd Ltd has improved its financial performance in the quarter ended March (Q4). The firm reported a consolidated net profit of `17.6 crs in the quarter; compared with a loss of `300 crs a year ago, its consolidated total income also saw a rise from `1777cr in Q4 FY10 to `2326crs in FY11. The company posted an operating profit compared with an operating loss for last years March quarter. Operating profit margin improved to 9% from 4.5% in the December quarter. Total operating revenue growth was at a strong 30.92%, but that was partly helped by a sharp increase in other operating income and a low base effect. The Companies order book of stands at `22,805 crs as on May 30, 2011. Punj Lloyd Ltd has won Landmark Railway contract worth `114 crs. The contract worth `114 crs is for building a railway siding for the Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited (UPRVUNL), a wholly owned state thermal power utility. The contract is scheduled to be completed in fifteen months.

Outlook
We have seen revival in business as per management guidance in last quarter restoring investors confidence in the company, we maintain our perception that execution is likely to improve from Q2FY 12. However recent fall has made stock valuation attractive for near term. PLL is currently trading at EV/EBITDA of 5.4x FY12E, respectively and at a PE of 11.9x for FY12E and 6.8x for FY13E EPSof `9.61 The recent fall in stock valuation attractive and one may see smart pullback from current levels. Long term holders can start accumulating at current levels. We also expect revival in engineering division in FY12 and expect a turnaround in FY12. The company has strong order book of `22.8 billion despite cancellations of Libyan order. Recommended buy at current levels.

June 13, 2011

18

Infrastructure Sector
IVRCL Ltd. Company Profile
IVRCL Infrastructures & Projects Limited is engaged in the business of development and execution of engineering procurement, construction and commissioning (EPCC) and lump sum turnkey (LSTK) facilities in various infrastructure projects like water supply, roads and bridges, townships and industrial structures, power transmission, for Central/State Governments, other local bodies and private sector in the country. It completed Phase III of the Sripada Sagar Project in Karimnagar District of Andhra Pradesh. It has also completed the Doubling of Mohol-Solapur BG Railway line work on Chennai-Mumbai Trunk Route. In November 2007, the Company acquired Alkor Petroo Ltd. The company has two subsidiary Hind dor Olive and IVRCL assets limited. (IVRCL) Q4FY11 result came in line with our expectations. Income from operation grew by 8.6%YoY. The operating profit at `1,781Mn however declined by 10% on yearly basis, due to rise in operating and contract expenses. The operating profit margin also lowered by1.82 % to 8.7% on yearly basis during the given quarter. Interest of `656Mn was higher by 25% YoY due to higher loans and advances to its subsidiaries. During the quarter, IVRCL had written off `390Mn being doubtful in nature and unsettled cost overruns for the rural electrification and Kerala building projects. Net profit after tax at `643Mn declined by 24.6% YoY due to rising commodities and interest cost coupled with less than expected revenues.

Investment Rationale:
Chennai desalination project revenue IVRAH has commenced commercial operations of its desalination plant at Minjur near Chennai. The project was implemented on DBOOT basis on a 25-year bulk water purchase agreement with the Chennai Metro Water Supply and Sewerage Board to supply 100 mn litres per day (MLD) of potable water at `48.74 a kilolitre. This would lead to additional revenue of `48.74 lacs per day or `175 crs annually. The desalination plant will take 240 mld of seawater and convert it to potable water using reverse osmosis technology. The project has been funded through debt equity of 75:25 and IVRCL holds 75% stake in the Equity while Befesa holds 25%. Strong order book IVRCLs Order Book stands at `252 bn as on date, which is 4x its sales that provides good earnings visibility. Of the total order backlog, `110 bn is from water segment, `65 bn from roads, `15 bn from Oil & Gas, `17 bn from power, and `45 bn from buildings segment. Lower dependence on Andhra Andhra Pradesh now constitutes only 16% of the order book which was at 24% in the December quarter reducing the burden on the Order book as the execution of projects in the state is slow due to political problems. The orders at AP are mostly in Water and irrigation space. The company is likely to focus on road projects, especially contracts where its subsidiary is the developer.

June 13, 2011

19

Infrastructure Sector

Near term CAPEX requirement to be fulfilled by internal accruals The company has near term CAPEX requirement of `560 mn which we expect company to fulfill from internal accruals only and management has indicated that there will be no further fund raising through debt/equity route in the near term and therefore no equity dilution or debt requirement. Execution to pick up in FY12 The company has shown decent performance. Despite slow down in Andhra Pradesh and other macro issues in FY11 We are expecting this trend to continue in Q4 and company to post 74% growth rate in revenue while margins are likely to be around 4.8%. Overall contribution from road segment is likely to improve to 17.5%.

Outlook & Valuation:

We have used SOTP based valuation methodology to arrive at the target price for IVRCL Infra Projects. For core construction business, we are valuing 10x FY12 EPS of `8.1 at `81. For Hindustan Dorr Oliver, the company holds 55% stake which is valued at `2147 millions. Giving a 50% discount to this holding in Hindustan Dorr Oliver, we arrive at value per share of `4.0. The 80.5% stake of IVRCL Infra in IVRCL Assets & Holding is valued at `8116 mn. Considering 50% discount to this holding, we arrive at value per share of `14. We recommend BUY on IVRCL Infra with a target price of `99 with a time horizon of 1-year.

SYNOPSIS The last year has been tough one for infrastructure companies. Despite all odds we are positive on infra space in long term. Most of the bad news like higher inflation, rising input costs, higher finance charges and availability of funding have been largely discounted in the prices. True, sustained interest rate increases (beyond 75 bps from current levels) can pose further downsides ; however, we are of the view that the current tightening cycle is nearer its end and we may see further rate hikes as being positive. We have analyzed infra companies on various key parameters as Track record of the players, Financial Strength, Management Team Order book, Ability to execute projects and Technological advantage. These aspects are important to judge the companys capability in executing projects and generating returns. We expect H2 of UPA term is likely to be better for infra companies as the government will keen to accelerate infra growth prior to next elections. We expect near term outlook for the infra sector to be turbulent due to various ongoing concerns however in longer term the stocks are quoting at very attractive levels. There are few companies like Punj Lloyd which have given signs of revival and turnaround as company turnaround in fourth quarter despite concerns about Libya and interest rates. The company has successfully repaid its FCCB holders in the last quarter retreating investor concerns about FCCB repayment. We expect infrastructure activity to pick up and government to come out with fresh orders in second half of CY2011. We also expect interest rate to be peaked out in second half of FY12. We dont foresee commodity prices to sustain at higher levels. We are also expecting interest rate to peak out in H2 FY12. At current valuations infrastructure companies are quoting at attractive levels on the various valuation parameters as book value, EV/EBIDTA and price to earnings ratio. We advice investors to start accumulating infra stocks at current levels for long June 13, 2011 20

Infrastructure Sector
term as we believe that growth in Infrastructure is important for the growth of the country and near term out look may be challenging for the sector but in longer term outlook on the sector is positive. Given the significant corrections we have seen in many of these stocks, rises in prices, when they happen, are likely to be swift and sudden and one who waits and watches, runs the risk of losing out on the race.

June 13, 2011

21