Construction sector update - Geojit BNP Paribas Financial Services

- Debt reduction through asset sales is a positive catalyst for infrastructure companies with high leverage. However, it seems that asset sales in the current scenario would be difficult. Experts view is that financing deals for road BOTs (build, operate, transfer) bid out over the last 1-2 years and thermal power units are becoming increasingly challenging.

- The first half is seasonally weaker than the second half for construction companies. The prospects of the leveraged companies look bearish while the industry outlook remains neutral.

- Execution will be weak in the near term though orders may remain stable.

- It appears that a 50 bps rate cut would have 3-8% positive impact on FY13 expected earnings.

- It is expected that stock specific concerns such as high leverage, low interest cover and weak environment for asset sales are likely to persist in the foreseeable future.

- In such a scenario, IVRCL and NCC Ltd are downgraded to 'reduce' from the 'hold' rating earlier.

- Target price for IVRCL has been cut to Rs.39 from the earlier target price of Rs.53.

- Target price for NCC Ltd has also been cut to Rs.34 from Rs.59 earlier.

- 'Reduce' rating for Punj Lloyd has been reiterated with a reduced target price of Rs.40.

- Simplex Infrastructure remains our top pick in the mid-cap construction space and the 'buy' rating is maintained on the stock with a target price of Rs. 272 over one year.

Source : Equity Bulls

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