Deutsche Bank - Equity Research Indian Infrastructure - Will infra projects get crowded out? Few projects will remain viable, even fewer companies profitable after borrowing at interest rates that exceed 17 per cent per annum. The Rupee's nosedive towards the Rs 44 mark, for the second time in a fortnight reflects less the strength of the US Dollar than an exercise on the part of RBI not to provide USD in the Forex market. Secondly, most generic pharma exporters, and IT concerns including the likes of HCL Tech, Infosys, Satyam and Wipro have forward sold US Dollar revenues at Rs 41. So even as the Rupee slides to Rs 44 vs the Dollar and even beyond, these concerns will not make a single paise of additional profits. Moreover, they will report quarter on quarter forex losses which though FCF neutral, will appear as a poor interpretation that these billion dollar organisations have made about the direction of the Rupee-especially a currency that comes with Current Account and Large Fiscal Deficits, slowing growth, rising interest rates and a FX Reserve based upon portfolio flows. It should be pertinent for all India watchers, that this is a nation where the Capital city was without Power on it's 61st Independence Day-A nation living more on hope and prayer? Or is it living upon the benevolence of the gurus and the 80 mn Gods which obsess the mind of the Indian's?
* Order inflow growth to peak in FY09 This week's Economic Advisory Committee report is yet another datapoint supporting our worry that FY09 (Mar) may be the peak year for order inflow growth for capital goods firms. The rise in interest rates and tighter lending standards, policy hurdles and poor project execution, worsening B/S and working capital ratios will likely affect new projects. We believe this will result in P/E de-rating for L&T, Siemens, BHEL, ABB, Areva, Thermax and Voltas. Top Sells are L&T, NTPC and Reliance Power. * Will there be a rise in interest rates and lending criteria for infra projects? In a press conference, RBI's governor stated that "special market operations for oil bonds used by oil companies, with RBI's intervention, will cease to exist, if not today then tomorrow or the day after", perhaps suggesting that banks would have to start funding oil bonds, which could have an impact on bond yields. In addition, unbudgeted liabilities now amounting to 5% of GDP would pose additional challenges for raising money for project financial closure. Our talks with a few large financial institutions suggest that this could have a serious impact on financial closure for new projects. * Policy hurdles and poor project execution Our biggest challenge seems to be a lack of sufficient reforms in land acquisition especially as brown field sites are getting exhausted. Also, a sharp rise in State electricity board losses suggests that we are heading for a mini fiasco in new generation capacity addition. Most importantly, execution of projects continues to get delayed with a possibility of only 7500MW of capacity implementation in FY09e v/s a target of 14000MW. Power capacity addition in FY08 was scaled down by 3000MW from the 9000MW announced earlier as many plants did not have the requisite equipment for declaring themselves commercially viable. * Resulting in worsening balance sheet and working capital ratios As highlighted by our earlier notes, Q1FY09 results suggest serious cash crunch problems for most capital goods players. Interest cost as a percentage of EBIT seems to have risen by 30-40%. Larsen and Toubro's recent announcement to seek an enabling approval from shareholders for a QIB of ~INR24bn (25% of networth) is also a sign of things to come. In our view companies could cut their targets for growth sooner rather than later. * Infrastructure plays to face the brunt of problems from financing Despite a sharp sell-off of stocks in both developer and capital goods spaces, we believe that the current valuations are quite rich and do not factor in the impact of a slowdown in the investment cycle. We note that (1) valuations are still well above the troughs at this stage of previous cycles, even after adjusting for better scale, margins, balance sheet, and RoE; (2) investors ought to focus on FCF and balance sheet deterioration, not just on earnings growth. * Top Sells : Reliance Power, L&T, NTPC, Tata Power, Lanco Infratech, IRB Infrastructure Developers. * Key upside risks, apart from large-scale FDI inflows, are meaningful progress on economic reforms relating to land acquisition, coal mining and privatisation, and a sharp fall in commodity and fuel prices. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. -- Posted By Ronald Chisley to Investor Forums at 8/18/2008 09:39:00 PM --~--~---------~--~----~------------~-------~--~----~ Logon at – http://investorline.co.in/blogs/news Learning Center- http://investorline.co.in/blogs/learning Mutual funds - http://investorline.co.in/blogs/mutualfunds Life Insurance - http://investorline.co.in/blogs/lifeinsurance Investor Journal - http://investorline.co.in/blogs/investor Latest News - http://investorline.co.in/blogger/?q=aggregator/categories/ Create your own Forum & Blog at - http://investorline.co.in/blogger To post to this group, send email to [email protected] Visit this group at-http://groups.google.com/group/investor-forums?hl=en -~----------~----~----~----~------~----~------~--~---
