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Foreign brokerage CLSA has increased price targets on five stocks namely Larsen & Toubro (L&T), IRB Infra, J Kumar Infra, NCC and BHEL. For Larsen & Toubro, the brokerage raised its target to Rs 2,570 from Rs 2,350 level earlier. For IRB Infra, it increased its target to Rs 360 from Rs 306 earlier. In the case of J Kumar Infra, the foreign brokerage raised its target to Rs 385 from Rs 364; for NCC the target is raised to Rs 118 from Rs 101 level. In the case of BHEL, the foreign broking firm increased its target price to Rs 57 from Rs 43.
The brokerage expects 2023 to be a year to buy users of materials. It said India engineering and construction (E&C) sector stocks could be re-rated and outperform in 2023.
The upgrade in price targets of the five stocks was seen, as CLSA rolled forward its valuations, factored in a cut in the risk-free rate to 7.25 per cent (from 7.75 per cent) and related re-ratings of PEs.
L&T
For L&T, it believes a tailwind for its order inflows, double-digit growth in core E&C execution, margin expansion after three years, 233 bps expansion in ROEs, capital reallocation, bonus dividends, and an inexpensive valuation should help L&T outperform the market again in 2023.
BHEL
Despite raising its target, CLSA reiterated its SELL rating on BHEL as India’s net-zero pledge, benign thermal capacity utilisation given lack of power demand growth over FY19-21, and its impact on discom financials leave few near-term catalysts.
J Kumar Infra
CLSA has maintained its ‘BUY’ rating on J Kumar Infra as it finds it an inexpensive play on high-growth
urbanisation capex with a foothold in metro rail contracting. It has raised J Kumar Infra’s EPS estimates by 0-15 per cent for FY23-25 on improved execution and margin visibility.
IRB Infra
CLSA said the key story for IRB Infra, which is now a Ferrovial and GIC group company, is that the company should start firing on both cylinders of toll traffic rebound and pickup in backlog from December quarter. Traffic on its flagship Mumbai–Pune expressway is growing but the key catalyst, CLSA said, is an 18 per cent tariff hike – a once- in-3-years event – due from April 1, 2023. The rest of its roads should secure 8 per cent-plus toll hikes for FY24, CLSA said.
NCC
CLSA expects the India’s third-largest construction backlog company to be a key beneficiary of India’s capex-focused Budget. Its water portfolio puts it in prime position for the central government’s Rs 67,200 crore (up 32 epr cent YoY) allocation for the Jal Jeevan Mission, CLSA said.
Sector outlook
CLSA expects strong orders and execution to translate to EPS, led by benign materials prices. This is as steel, bitumen and diesel prices have fallen 18 per cent, 15 per cent and 5 per cent from their recent peaks, raising the prospect of faster execution with visible margins in 2023, the brokerage said.
“The government capex has sustained an E&C backlog in the absence of private Capex in the past three years, but it has not grown much initially due to revenue pressure from Covid and a rise in materials in 2022 that made many projects seek fresh approvals for higher costs,” it noted.
CLSA said the government awards picked up 12-18 months prior to the 2019 central elections, and the same could happen in 2023, which is the last window before the ordering embargo comes into effect in 1Q24 for the April-May 2024 elections.
“Middle East capex should be supported by past under-investment plus energy transition. Industrial Capex is picking up, with select industries like steel reaching 80 per cent-plus utilisation. Capacity add is likely to double over FY22-25 for steel and cement. PLI capex should begin after one-year delay, but much of capital goods could be imported,” CLSA said.
India’s E&C and developers outperformed the broad market for a second year in a row in 2022, and we think the stars are aligned for a third year of outperformance. This is as India’s engineering and construction (E&C) sector, excluding defence plays, have emerged stronger from a Covid-hit FY20-22 in terms of balance sheets and cost structures, and are now seeing a revival in backlogs, stronger execution led by construction, and expanding margins from BHEL.
The revival of private capex is visible, with L&T winning its biggest private order in four years, helping it to sustain its backlog at double-digits, CLSA said.
“Book-to-bill (BTB) bounced to 3.1 times (2.9 times 2QFY22), supporting execution visibility until FY25. The outlook has improved with 18 per cent, 15 per cent and 5 per cent falls in steel, bitumen and diesel prices, raising the prospect of faster execution with visible margins in 2023. Business visibility (BTB 3 times), an order pick-up and margin visibility are rerating catalysts. We adjust earnings and raise our target prices for our E&C coverage,” it said in a note on January 11.
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