Sector Update: Infrastructure Sector - Kotak

- Infrastructure sector was impacted in past few years owing to issues related to lack of order inflows, execution challenges, higher debt and higher working capital. These issues had impacted the valuation multiples also for the sector for a long period of time.

- With large number of projects in pipeline for the sector and upcoming projects under Bharatmala programme, affordable housing as well as irrigation projects, we expect significant upswing in the order inflow and execution cycle of the companies. Also, we believe that infrastructure sector is in a much better position in terms of healthy order books, expectations of order inflow revival across other segments, improved margins, cleaner books owing to lower leverage as well as lower interest rates. Order inflow so far for the companies has also been ahead of expectations. Working capital cycle for the companies are likely to come down further going forward owing to higher customer advances, recovery of debtors and reduction in loans and advances owing to stake sale in subsidiaries.

- We believe that sector is set for a re-rating with above parameters largely in place. Earnings recovery and surge in order inflows is also likely to aid the valuation re-rating for the sector. Stocks have already moved up sharply since our last BUY recommendation. We continue to maintain our positive bias for the sector with preference towards EPC companies like Simplex Infrastructure (BUY, TP Rs 668), NCC (BUY, TP Rs 134), KNR construction (BUY, TP Rs 322) and PNC Infratech (ACCUMULATE, TP Rs 198). We upgrade our rating and target price for Simplex Infra, NCC and KNR Construction to take into account the sharp scale up in execution and order inflow going forward.

Source : Equity Bulls

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