Infrastructure sector outlook

The third quarter FY12 numbers of the infrastructure companies were mixed bag with some of the companies disappointed on execution, margins and net profit front. Execution was likely to increase significantly from Q3FY12/Q4FY12 onwards, however it continued to remain below expectations due to adverse macro-economic scenario of high interest rates and delays in project approvals.Profitability was impacted by poor execution and continued high borrowings and working capital requirements.

Companies like IVRCL,NCC,BGR Energy and J Kumar Infra were impacted by these issues. However, IRB Infra, JP Associates, Unity infra and Pratibha industries outperformed market expectations.

Current order books remained healthy but execution growth was impacted due to very high interest rates or lack of funding to achieve financial closure or environmental clearance related issues. Companies like IRB Infra, JP Associates, Unity Infra and Pratibha industries reported excellent growth which was better than estimates. Operating margins declined for Q3FY12 on yearly basis due to increase in costs as well as change in revenue mix.

However, for the full year FY12 operating margins are expected to come down by 25-
50 bps in comparison with last year due to increased competition as well as
higher raw material prices for fixed price proportion of order book. Going forward
in FY13, one can expect margins to be maintained at similar levels.

Areva T&D Demerger

Post the acquisition of Areva T&D by a consortium of Alstom and Schenider Electric, the operations of Areva T&D india have been bifurcated into transmission business (to be retained by Alstom group) and distribution business (to be transferred to Schneider Electric).
As part of the demerger scheme, the shareholder of Areva T&D will receive one share of the demerged company (to be named Smartgrid Automation Distribution and Switchgear Ltd) for every share held in Areva T&D.
Smartgrid Automation Distribution and Switchgear Ltd would be listed by the end
of January 2012. The stock became ex-date on Dec 14, 2011, following which the price corrected 24% to reflect the valuation of the transmission entity only.

Based on DCF calculations, the target price works out to Rs 158 per share, thus valuing at 22x CY12 earnings. The growth outlook for the T&D equipment sector continues to be weak given overall reduction in power and industrial sector investments pipeline in H1 FY12. In line with general derating of PE multiples for the Capital Goods, the MNC T&D pack has also witnessed a correction.Investors could wait and accumulate the stock on sharp declines only.

Punj Lloyd

Result Update: Punj Lloyd.

Revenues of Punj Lloyd for Q1FY12 reported a growth of 40% on consolidated basis as against same period last year. This was better than market expectation and led by improved execution. Operating margins witness an improvement on sequential and yearly basis and stayed at 7.4%.Company's profitability was impacted by increase in interest outgo which resulted in net loss for Q1FY12.

At current price of Rs 56, stock is trading at 8.5x P/E and 7.0x EV/EBITDA for FY12 respectively. For FY12,higher interest rates may continue to impact overall performance of the company. Due to high working capital requirements of the company coupled with high interest rates, the stock is expected to under-perform from these levels.

Bharat Electronics Ltd (BEL)

Bharat Electronics Ltd (BEL) Results update:

BEL posted strong set of numbers for the fourth quarter as the company managed to post its targeted revenue numbers for the year. For the quarter, margin expansion was aided by higher revenue booking (42% of full year revenue vs 36% in Q4FY10), change in product mix and absence of provisions for pay revisions.

Tax rate is lower possibly due to higher R&D expenditure. Even as the Capital Goods sector has struggled to book orders during the fiscal, BEL has won major orders. Resultantly, its order backlog has doubled in FY11, thus it is strongly positioned for driving revenue growth in FY13 and beyond. The company should also be a beneficiary from the offsets that are likely to accrue from the US$10 bn aircraft order that the Indian government is all set to place with Rafale or Eurofighter.

The company enjoys a dominant status in the defence sector and has a steady growth profile. At 16.2x, near-term valuations are close to the higher end of its trading range of 8-16x. The business is high-end with rich profitability and strong cash generator. In view of this, long term investors can accumulate the stock with a price target of Rs.1913.

Infosys Technologies

Result Update: Infosys Technologies:

Infosys' 3QFY11 results : Volume growth at 3.1% QoQ was below expectations. However, a 1.6% rise in average realizations were surprising. Margins came in line with market expectations.The guidance for a marginal growth in USD revenues in 4Q is predicated on the short term concerns about the global macro scene.

Infosys management has likely taken a conservative view of the short term challenges. On the other hand, management did indicate that CY11 may be a normal year for the industry with growth in mid - high teens. One can expect Infosys to grow at above-industry rates in FY12E.

Infosys has raised the revenue and EPS growth guidance for FY11, marginally. FY12E EPS stands at Rs.149 (INR - USD exchange rate at 45) and accordingly the price target works out to Rs.3620.
Infosys is benefiting from the positive change in client sentiments and the presence of various margin levers. Infosys' long term strategy is geared towards providing services through new engagement models.