E&C

Sector outlook

Bharat Parekh
Covid-19 curfew cuts
Stocks pricing in lot more pessimism—NIP is the key stimulus
[email protected]
+91 22 6650 5020 After factoring-in the crude crash impact (Covid-19 hits regulated utilities) we see the
Covid-19-led 42-day country-wide lock-down, lower utilisation rates from demand
destruction and weak government finances which were diverted to social causes and
claims slowing domestic Capex. More importantly, these disruptions are happening
during the peak ordering (4Q) and execution season of 1H. Hence, we cut our E&C
universe target prices by 8%-27% with EPS cuts of 3%-37% as we factor-in complete
site shutdowns from 23 March to 7 May, particularly due to an exodus of workers. We
take a deep dive into leverage and pledges, to find it is an issue in our universe. Also,
FY21 will be year of litigation due to force majeure, so we research anecdotal
15 April 2020 evidence. Last, the government has little choice but to pump-prime the economy with
its own/CPSE Capex, as the corporate tax cut failed to revive Capex. We advises
India buying early-cycle plays trading, which happened to be at 10-year multiple lows such
Infrastructure as L&T, JKIL, IRB, Sadbhav & NCC following sharp 15%-45% price corrections.

The impact of the unholy trinity on domestic Capex

Top pick: L&T (+62%)
q The curfew broke business momentum. India observed ‘Janta (people's) curfew’ on 22 Mar
Larsen & Toubro LT IB followed by national lockdown from 25 Mar to 3 May. This not only broke order
Rec BUY momentum (L&T booked 26%-70% of its 4Q orders in the last 10 days (Figure 2)) but of
Market cap US$16.03bn execution as well.
Price Rs866
Target Rs1,550→Rs1,400 q We see a greater impact on domestic demand destruction due to Covid-19 for industrial
Up/downside +62% Capex versus construction (government led). Many sectors may see -2 to +2% demand
growth in FY21 (Figures 16-18), which may lead to Capex deferments such as NTPC's first
BHEL BHEL IB power plant order in two years.
Rec BUY
Market cap US$1.01bn q We also anticipate an impact on Capex given weak government tax revenue, delays in
Price Rs22 divestments given the equity market collapse and the diversion of budgets for social causes
Target Rs55→Rs40 (Rs1.7tn social package) and force majeure claims. Though this did rise Rs140bn (11%
Up/downside +81% growth in the cess fund, Figures 19-21) via the oil cess hike in March.
IRB Infra IRB IB q The exodus of workers from metros (Figures 6 & 8) following the curfew will hurt execution
Rec BUY even if select states lift lock-downs for infrastructure projects before 3 May (Figure 7).
Market cap US$0.3bn q The silver lining is a low base due to disruption in FY20 and low material prices.
Price Rs66
Target Rs180→Rs166
Up/downside +152% Understanding force majeure and its impact on developers and builders
q Our deep dive into the model concession agreement (MCA, Figures 25 & 26) and
JKIL JKIP IN government announcements (Figures 23, 24 & 27) makes us believe developers are better
Rec BUY
Market cap US$0.08bn
placed to recover compensation now versus the demonetisation period, when tolling was
Price Rs80 stopped for 23 days as the mechanism was tested.
Target Rs260→Rs230 q Anecdotal evidence (Figures 28-34) suggests it takes 6-9 months to recover 90% of claims
Up/downside +188% from the gov./NHAI. If developer's file claims as political events (Fig. 25) they will receive
cash compensation for interest and O&M, with the rest paid by extending concessions.
NCC NJCC IN
Rec BUY q Our talk with EPC companies suggest that they are likely to file claims as well.
Market cap US$0.19bn
Price Rs24 Leverage and pledge is not an issue among our coverage
Target Rs79→Rs63
q All companies are either net cash (BHEL & L&T parent), have low leverage (JKIL) or
Up/downside +163%
have recently completed massive deleveraging by monetising assets in favour of
Sadbhav Eng SADE IN 'patient capital'. IRB's GIC deal will lead to a 63% fall in leverage (Figure 53), while
Rec BUY Sadbhav's deal with CPPIB-led InvIT will cut its net debt to less than half (Figure 50).
Market cap US$0.06bn Further, road developers have took a part moratorium in March and expect to take it in
Price Rs26
Target Rs160→Rs130 April as well. Promoter pledges (Figure 32-36) are unlikely to lead to any stock supply.
Up/downside +393% Hence, we do not see any stress among our coverage.
Where can orders come from? The government has little choice
q We believe that after corporate tax cuts failed to drive any Capex uptick, there is little
choice but for the government to pump-prime the economy with its own Capex, should
it choose to loosen the fiscal limits. We see the government having a robust pipeline of
projects in its US$1.4tn national infrastructure pipeline (read, Figures 63-71) across
highways, railways (read) & urban infrastructure such as rapid rail (read) and metro rail.
www.clsa.com
CLSA and CL Securities Taiwan Co., Ltd. (“CLST”) do and seek to do business with companies covered in its research reports. As such,
investors should be aware that there may be conflicts of interest which could affect the objectivity of the report. Investors should consider
this report as only a single factor in making their investment decisions. For important disclosures please refer to page 39.
 Covid-19 curfew cuts E&C

We would like to thank Evalueserve for its help in preparing our research reports. Bhavik Mehta (IT); Kushal Shah (Midcaps); Shreya Shivani (BFSI) and Akshay
Chandak (Strategy) provide research support services to CLSA.

Impact of the unholy trinity on domestic Capex

Figure 1

India announced ’Janta Prime Minister called for a curfew and lockdown
(people's) curfew’ on March
19 on 22 March followed by
a nationwide lockdown
from 25 March to 14 April

Source: PIB

Figure 2

4Q is a busy quarter for L&T: percentage of 4Q orders in the past 10 days

India E&C companies 80%
where March-end garners
the lion’s share of orders 70%
due to the government’s
push to complete targets 60%

50%
This was missing for most
companies, except L&T, 40%
which won a few large
orders 30%

20%

10%

0%
FY17 FY18 FY19 FY20
Source: Company, CLSA

Figure 3

Currently 22% of India’s Covid-19 spread and government testing centres

10,981 cases are from
Maharashtra

Source: CLSA, Ministry of Health

Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com

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Figure 4

Maharashtra accounts for L&T: order book composition

10% of L&T’s consolidated
Order-book

Source: CLSA

Figure 5

Covid-19 cases in India Covid-19 cases: incremental cases

crossed 10,981 on 14 April 1,600 50
India Covid-19 daily new cases added
2020 1,400
India Covid-19 Incremental Cases 3DMA 40
1,200
1,000 Daily growth in cases (%) (RHS) 30
800
600 20
400
10
200
0 0

Source: CLSA, World Health Organisation, Ministry of Health, Worldometer. As on Noon, 14-Apr-20

Figure 6

The exodus of workers from Covid-19: exodus of workers from metro areas
metro areas following the
curfew will hurt execution
even if lock-down is lifted
as planned.

Source: CLSA

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Figure 7

Many state governments The government of Maharashtra: orders to resume work on large projects
such as Maharashtra have
issued orders to start work
on large infrastructure
projects such as the
Mumbai-Nagpur
expressway. . .

. . . we fear that such orders

will only help partially due
to the exit of labour

Source: CLSA, Govt. of Maharashtra

Figure 8

L&T committed to donate Larsen & Toubro: its fight against Covid-19
Rs1.5bn to the PM CARES
Fund to fight Covid-19

It has allocated Rs5bn to

support 160,000 of its
300,000 contract workers
who are sheltered in their
labour camps

Recalling the balance of

140,000 workers will be a
key challenge

Source: Company

Figure 9

Covid-19 India impact: M S Unnikrishnan, MD & CEO of Thermax India says. . .

Source: CLSA, Thermax

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Figure 10

BHEL ran run only essential BHEL: Business disruptions due to Covid-19
services in its
manufacturing facilities
from 23-03-2020 until 31-
03-2020

Source: BSE

Figure 11

Thermax suspended Thermax: suspension of production due to the lockdown

production till 31 March
and then extended it
further till 41 April after the
announcement of the 21-
days of lockdown

Source: BSE

Figure 12

Dilip Buildcon suspended Dilip Buildcon: Business disruptions due to Covid-19

the operations at all
locations due to Covid-19
pandemic

Source: Company

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Figure 13

Mumbai Metro Line 4 Work Mumbai Metro Line 4: during the lock-down
stopped due to COVID-19

Source: CLSA

Figure 14

Construction activity in Mumbai Metro Line 3: during the lock-down

cities like Mumbai, Pune,
Delhi stalled and may
continue at a much slower
pace in April

Source: CLSA

Figure 15

Covid-19 is affecting MMRDA’s comment on project timelines

project timelines

Source: CLSA

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Figure 16

With the impact of Covid- Cement demand growth: change in estimates

19, we expect FY21 to be
weaker, particularly in 1H
.

Source: CLSA, Ministry of Commerce

Figure 17

India’s power demand has India power demand: March–April 2020

started to collapse
following the country-wide
mandatory lockdown; this
should help regulated
generators reduce working
capital during the
forbearance period

Source: Posoco, CLSA

Figure 18

We expect FY21 to be Power demand growth: change in estimates

weaker, particularly in 1H 9% New Old
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
FY15 FY16 FY17 FY18 FY19 FY20CL FY21CL FY22CL

Source: CLSA

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Figure 19

The quantum of the CRIF CRIF total outlay

has seen a Cagr of 24% over
the past five years

The government raised

Rs140bn, an 11% growth in
the cess fund via the oil
cess hike in March

Source: CLSA, Budget

Figure 20

The CRF allocated 62% of CRIF Spending: FY18

its fund to roads in FY18
with the remaining 38% Railways Roads Rural Development
split between, Railway and
rural development 5%

32%

63%

Source: CLSA, Budget

Figure 21

The revamped CRIF only CRIF total outlay: FY20

allocated 45% to roads. . .
0% Defence
2%
1% 4% Railways
Roads
. 6% 14%
Rural Development
. . . as seven new ministries 7%
fight for a share of the pie Telecom
6% Health and Family Welfare
3% Housing and Urban Affairs
4%
45% Education and Literacy
8% Water and Sanitation
Petroleum and Natural Gas
Power
Shipping

Source: CLSA, Budget

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Understanding force majeure and the impact on

developers and builders
Figure 22

Businesses started receiving MoF direction on force majeure

force majeure notices due
to Covid-19

Source: Ministry of Finance

Figure 23

India Railways clarified the Ministry of Railways: force majeure

spread of Covid-19 should
be considered as a natural
calamity and the force
majeure clause may be
invoked

Source: Ministry of Railways

Figure 24

IRB’s recently-won Mumbai Mumbai-Pune expressway: closed during the Covid-19 lockdown
Pune expressway tolling is
also shut

Considering the authority

has already announced this
as a force majeure event,
IRB will be eligible for
compensation

Source: MSRDC

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Figure 25

Force majeure may occur NHAI: definition of force majeure

when events occurs beyond
the reasonable control of
the affected party

If a developer files its claims

as ‘political event’ then it
will get cash compensation
for interest and O&M, with
rest paid by extending
concessions

Source: National Highways Authority of India

Figure 26

The compensation due to NHAI: what will the NHAI reimburse to concessionaire be?
force majeure includes
interest payments on debts
and O&M expenses and not
loss of revenue or any debt
repayment

If due to force majeure the

concessionaire is unable to
collect fees, then the
collection period may be
extended

However, the event

interrupting services to the Source: National Highways Authority of India
project highway should be
more than seven days Figure 27

MoRTH advises NHAI to close the Toll Plaza

Post this, all toll-plazas

were closed down till 14
April

Source: PIB

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Figure 28

IRB was compensated IRB Infra: impact of demonetisation

partly through cash
payment and partly through
extension of concession
agreement

Source: Company

Figure 29

Till 31 March 2017, Ashoka Ashoka Buildcon: impact of demonetisation

Buildcon was also not fully
compensated for the
revenue loss

Source: Company

Figure 30

Sadbhav Eng. only received Sadbhav Engineering: impact of demonetization

34% of the total claim till 31
March 2017

By 31 March FY18, only

45% was recovered

And by 31 March FY19,

only 51% was recovered

Source: Company

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Figure 31

Till 31 March, 2017, only L&T: impact of demonetisation

half of the total claims were
paid by the NHAI to L&T
IDPL

Source: Company

Figure 32
Krishnagiri Thopur had
realised 90% of its interest L&T IDPL Road SPVs: Impact of demonetization on Krishnagiri Thopur
cost by end-FY17

Source: Company

Figure 33

Krishnagiri Walajahpet had L&T IDPL Road SPVs: Impact of demonetization on Krishnagiri Walajahpet
realized 90% of its interest
cost by end-FY17

Source: Company

Figure 34

L&T IDPL Road SPVs: Impact of demonetization on L&T BPP Tollway

Source: Company

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Leverage & pledge not an issue during this cycle

Figure 35

What’s different in the India E&C and developer leverage: net debt to equity
ensuing cycle is the under-
leveraged balance-sheets of
contractors and developers
alike

This should help the

companies under our
coverage to withstand
rough patches, such as
Covid-19

Source: CLSA

Figure 36

IRB promoters created IRB: encumbered shares

‘non-disposal
encumberance’ not a pledge
for 18% of their ownership
/10% company stake in
favour of GIC-affiliates as a
part of its private InvIT deal
to comfort the sovereign
wealth fund

Source: CLSA, Company

Figure 37

JKIL’s promoters 8m JKIL: pledged shares

pledged shares have 34%
remained unchanged in
years 32%

30%

28%
It has steadily increased its
shareholding 26%

24%

22%

20%
FY18 FY19 Jun-19 Sep-19 Dec-19 Current
Source: CLSA, Company

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Figure 38

NCC’s promoters were NCC: pledged shares

steadily reducing their high
pledge over the course of
FY20

Their plan will have to be

postponed due to the
Covid-19 led disruption

Source: CLSA, Company

Figure 39

Sadbhav’s promoters’ were Sadbhav Engg: pledged shares

comfortable in 3QFY20
with about 30% of their
shares pledged

It pledged an additional
26% of its shares in 4Q

Source: CLSA, Company

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Disruptions in FY20
Extended monsoon (June – September 2019)
Extended monsoon affected q JKIL: June and July were very harsh but apart from that there was a big issue with
construction activities of labour shortage during Parliamentary elections
big players like JKIL, q Sadbhav Engg: 2 projects worth Rs. 21bn that is Lucknow Ring Road and Mumbai -
Sadbhav and NCC Nagpur where we already started the construction before monsoon, actually. And
during the monsoon period, the major construction activity could not be conducted in
these two projects mainly because both are the greenfield projects
q NCC: Nagpur – Mumbai E-way slipped due to heavy rainfall. R.S. Raju – Revenue hit
due to extended monsoon in 2QFY20 is Rs2.5-3bn
q Coal India: Coal India said its output for the six months to the end of September 2019
fell 6%, with September production dropping 23.5% to the lowest level in months

Natural Calamities
Floods and cyclones caused q Karnataka Floods (Aug 2019): Overall, the property damage caused by the floods
huge damage to plant and across the state is estimated to be around ₹35,160.81 crore.
property last year q Cyclone Fani (May 2019):The overall damage caused by Fani in India and Bangladesh
combined is estimated to be around ₹58 thousand crores (US$8.1 billion)
q Dipka Mine Flooding (Oct 2019): The flooding at the Dipka mine, which produces
more than 30 million tonnes a year of thermal coal and accounts for some 5% of Coal
India's overall output including to NTPC Ltd's Sipat plant. An NTPC official said the
company's plant in Sipat, which had no stock of coal as of Sept. 30, according to
government data, was trying to arrange alternate sources of coal.

Court order led disruptions

The mining and q Goa & Karnataka (Feb 2018): Closure of mines and disruptions due to changes in
construction ban hit the legislations has thrown the sector out of gear. The combined job losses both direct and
construction sector and real indirect, as a fallout of mining bans in Karnataka and Goa is pegged at 1.28 million.
estate sector last year hard From a share of 1.93 per cent in FY13, the mining sector's contribution to the GDP has
substantively declined to 1.63 per cent in FY19.
q Rajasthan (Nov 2017):On November 16, 2017, the Supreme Court (SC) of India,
prohibited 82 large lease holders from mining sand and stone activities in absence of
scientific replenishment study. The ban continued all through the year of 2018. After
SC ban, the state government tried various efforts to provide relief to construction
sector and halted governmental infrastructure projects.
q NCR Construction ban (Nov 2019): The Supreme court had imposed ban on
construction and demolition in Delhi-NCR, to check rising air pollution levels. The
construction ban had badly hit the real estate sector. It had also impacted work on
public utilities such as the metro.
q Parveen Jain, vice chairman of National Real Estate Development Council (Naredco),
said, “We are expecting the construction ban to result in delay of at least 2-3 months.
q Getamber Anand, chairman of Noida-based developer ATS Infratech said “One day ban
is equal to 10 days of delay since work has to be stopped completely and starting it
again and bringing it back to the same pace take time.”
The Bombay High Court has q Mumbai Coastal Road (July 2019): The Bombay High Court’s had stayed the execution
stayed L&T’s largest E&C of the Rs140bn coastal road project due to want of environmental clearances. L&T was
order for most part of FY20 awarded Rs75 bn of contracts in this project, which was it's largest infrastructure
domain contract (3% of its E&C backlog), while HCC, in a joint venture with Hyundai
Development Corporation, was executing Rs 21.3bn of contracts. However, in Dec’19
SC allowed work to resume on the coastal road project.

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What is the construction worker’s fund?

The central government q State governments to be directed to utilise an existing Rs. 310bn welfare fund for the
directed state governments benefit for 350mn construction workers.
to utilise the existing q The Act is to provide for the levy and collection of a cess at a rate not exceeding two
Rs310bn welfare fund to per cent on the cost of construction incurred by employers with a view to augmenting
help building and the resources of the Building and Other Construction Workers’ Welfare Boards
construction workers during constituted under the Building and Other Construction Workers (Regulation of
the time of crisis Employment and Conditions of Service) Act, 1996.
q The proceeds of the cess collected shall be paid by the local authority or the State
Government collecting the cess to the Board after deducting the cost of collection of
The government has used such cess not exceeding 1% of the amount collected.
around Rs30bn of this fund q The funds so collected are to be used for providing financial assistance to the families
in the past 21 days of registered workers in case of accident, old age pension, housing loans, payment of
insurance premium, children’s education, medical and maternity benefits, etc.
Figure 40

Funds left after spending on BOCW: funds as of 31 March 2019

welfare schemes as of 31
March, 2019 stood at
Rs303bn

Source: Ministry of Labour & Employment

Figure 41

Section 60 of the act gives BOCW section 60

the central government the
power to give directions to
state governments
regarding the use of the
fund

Source: Govt. of India

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Figure 42

UP has the most building Top five states with highest number of building and other construction workers
and construction workers

Source: Ministry of Labour & Employment, CLSA, *data up to 30.09.2018

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Corporates: To remain profitable despite tough

times on backlogs & asset-churn
L&T (LT IB) – BUY (CMP Rs 866, target price Rs1,400)
We expect L&T’s electrical q While markets are worried about L&T's divestiture deal with Schneider-Temasek JV
and automation business (Fig 42), we understand it’s delayed due to time taken for novation of large amount of
divestiture to conclude by contracts and likely conclude latest by 2QFY21 vs 4QFY20. Conclusion of this deal
2QFY21 could lead to one-time dividend of Rs66/share.
q Owing to Covid-19 Pandemic, some key orders has been postponed and demand
destruction in industrial sector shall delay it even further. Due to which we cut our
order E&C Inflow est for both FY20 and FY21 by 4% and 7% respectively.
q Moreover, the lock-down has also stalled execution for 9 days in March and almost a
month in Q1FY21 impacting the revenue of the company both in Q4FY20 and
Q1FY21.
q We cut EPS by 3-7% on 4QFY20/FY21 E&C inflows by 4-7% and execution by 3-5%
(Figure 43) on lock-down / exodus of labour (140k of 300k). Also factor-in higher
credit costs at its Finco business in FY21 and it's Rs1.5bn donation for Covid19 in
4QFY20.
L&T trades at -1 std. on q However, L&T is a good proxy for domestic capex and the company has a credible
E&C PE, close to its 2008 strategy to improve growth and ROE (read).
low
Figure 43

We cut our EPS by 3%-7% L&T inncome statement summary

for FY20-21 due to the L&T (Rs bn) FY18 FY19 FY20CL FY21CL FY22CL
lockdown/exodus of labour Total Order Inflow 1,529 1,708 1,715 1,730 2,015
and likely impact on - Growth % 7% 12% 0% 1% 17%
demand destruction for - E&C+HC 1,217 1,387 1,300 1,252 1,473
industrial Capex - Growth % 6% 14% (6%) (4%) 18%
Revenue 1,190 1,410 1,528 1,615 1,842
- Growth % 9% 19% 8% 6% 14%
Ebitda 134 163 171 194 224
- Growth % 21% 22% 5% 13% 16%
Recurring PAT post minority interest 68 84 97 101 121
- Growth % 22% 23% 16% 4% 20%
Source: Company, CLSA

Figure 44

L&T divested the E&A L&T: an extremely good divestiture

business to Schneider for
Rs140bn

Source: CLSA

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BHEL (BHEL.BO) – BUY (CMP – Rs 22, target price Rs40)

We cut our EPS for FY20- q Owing to Covid-19 Pandemic, BHEL's largest order worth Rs65bn (24% of earlier est
21L by 21%-30% as orders inflow) of FY20 expected in March 2020 has been postponed to 1QFY21. Though
were postponed and BHEL booked its largest emission control capex order from NTPC despite Covid19 in
execution has stalled due to March'20. Further, with demand destruction caused by lock-down in April'20, we see
Covid-19 power demand growth of +2%yoy in FY21 on flat FY20. Due to which we cut our order
Inflow target for both FY20 and FY21 by 23% and 10% respectively.
q Moreover, the lock-down has also stalled execution for 9 days in March and almost a
month in Q1FY21 impacting the revenue of the company both in Q4FY20 and
1QFY21.
q While BHEL's mother plants in Haridwar city is likely in 'green zone' due to just 3
Covid19 cases and hence, could open from April 4th week, it's other plant in Trichi /
Raniper could fall in yellow zone with 30+ cases and hence, may take longer. Further,
mobilizing site workers also may take time.
q This would impact the EPS of the company by 21% and 30% during FY20 -21CL.
q However, we see the government looking to unlock value in the company by cutting its
stake. This could bring a focus to BHEL’s assets/replacement cost, which is 2x CMP
and would be a notable catalyst for the stock. Valuations are compelling at EV/EBITDA
of 2.9x, PER of 5.8x FY21CL and 6.4% yield.
Figure 45

BHEL’s book to bill shall will BHEL: book to bill

see the deferment of orders
due to the slowdown in
power demand

Source: Company, CLSA

Figure 46

Due to Covid-19, large BHEL: income statement

orders are being postponed FY ends on Mar 31st, (Rs mn) FY18 FY19 FY20CL FY21CL FY22CL
and execution is also being Net Sales & Other Op. Income 288,130 303,490 262,469 264,066 305,566
delayed leading to a fall in - Growth % 2.0% 5.3% (13.5%) 0.6% 15.7%
its top-line in FY20 EBITDA 19,329 21,420 17,023 17,357 22,090
EBITDA Margin 6.7% 7.1% 6.5% 6.6% 7.2%
- Growth % 7.3% 10.8% (20.5%) 2.0% 27.3%
PBT 15,850 20,579 12,055 12,607 15,956
PBT Margin 5.5% 6.8% 4.6% 4.8% 5.2%
- Growth % 19.3% 29.8% (41.4%) 4.6% 26.6%
Rec PAT 8,066 12,154 8,720 9,077 11,488
Rec PAT Margin 2.8% 4.0% 3.3% 3.4% 3.8%
- Growth % (32.6%) 50.7% (28.3%) 4.1% 26.6%
Exceptionals 0 0 0 33 31
Reported Profit 8,066 12,154 8,720 9,110 11,519
Rep PAT Margin (%) 2.8% 4.0% 3.3% 3.4% 3.8%
Source: Company, CLSA

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Some of JKIL’s bids were JKIL (JKIP.BO) – BUY (CMP – Rs80, target price Rs230)
postponed due to covid-19 q JKIL is the least impacted due to its well-funded clients such as JICA-funded, Mumbai
which may impact its EPS Metro Rail corp. and lofty book but it's execution may be impacted by lock-down in
by 8%-21% in FY20-21 Maharashtra (most impacted state by Covid19) and labour exodus. Here company has
done a good job by keeping as many workers as possible in labour camps (Figure 47)
and keep them in good spirits.
q Owing to Covid-19 Pandemic, some of its bids has been postponed. Due to which we
cut our order Inflow target for both FY20 and FY21 by 12% and 28% respectively.
q Moreover, the lock-down has also stalled execution for 9 days in March and almost a
month in Q1FY21 impacting the revenue of the company both in Q4FY20 and Q1FY21
q This would impact the EPS of the company by 8% and 21% respectively in FY20-21.
q JKIL is an inexpensive play (3x FY20CL) on high-growth urbanisation Capex with its
success in metro rail contracting.
Figure 47

JKIL has done a great job of JKIL: managers addressing workers during the lock-down
retaining workers in its
labour camp

It has kept them in good

spirits, so it can start the
work whenever the state
government permits such

Source: CLSA

Figure 48

JKIL’s lofty order book JKIL: book to bill

ensures visibility of over
three years

Source: CLSA

15 April 2020 [email protected] 20

 Covid-19 curfew cuts E&C

Figure 49

We cut our execution JKIL (P): income statement

forecast 4%-15% for FY20- FY ends Mar31st, (Rs mn) FY18 FY19 FY20CL FY21CL FY22CL
21 which brings down our Income from operation 20,507 27,871 31,386 36,188 41,700
EPS down 8%-21% from our Less: Excise duty - - - - -
previous estimate Net Sales ( Rs mn) 20,507 27,871 31,386 36,188 41,700
- Growth % 27.8% 35.9% 12.6% 15.3% 15.2%

Net Materials 12,087 17,203 19,444 22,475 25,823

Employee Cost 1,971 2,477 2,758 3,162 3,602
Other Expense 3,237 3,828 4,248 4,897 5,643
Total Expense 17,295 23,508 26,449 30,535 35,069
EBITDA ( Rs mn) 3,212 4,363 4,937 5,654 6,632
-EBITDA margin% 15.7% 15.7% 15.7% 15.6% 15.9%
- Growth % 28.2% 35.8% 13.2% 14.5% 17.3%
Depreciation 727 1,022 1,149 1,242 1,315
EBIT 2,485 3,341 3,788 4,412 5,317
- EBIT margin % 12.1% 12.0% 12.1% 12.2% 12.7%
Interest & Other income 285 281 316 408 540
Interest Expense 703 939 994 1,192 1,382
PBT 2,067 2,683 3,110 3,628 4,474
- PBT margin % 10.1% 9.6% 9.9% 10.0% 10.7%
Total Taxes 701 912 1,050 1,088 1,297
Tax rate 33.9% 34.0% 33.8% 30.0% 29.0%
Rec PAT 1,366 1,771 2,061 2,540 3,177
Extra ordinary Income/Exp. - - - - -
Rep. PAT 1,366 1,771 2,061 2,540 3,177
Rep PAT Margin 6.7% 6.4% 6.6% 7.0% 7.6%
- Growth % 27.2% 29.7% 16.4% 23.2% 25.1%
Source: CLSA

15 April 2020 [email protected] 21

 Covid-19 curfew cuts E&C

Stalled execution due to Sadbhav Engineering (SADE.BO) – BUY (CMP – Rs 26, target price Rs130)
lockdown may impact EPS q Owing to Covid-19 Pandemic, many of Sadbhav’s bids has been postponed by NHAI.
of the company by 18-34% This coupled with managements pre-occupation with concluding it's strategic deal with
in FY20-21CL CPPIB-led InvIT, led to Sadbhav not wining any order during FY20. Due to which we
cut our order Inflow target for both FY20 to nil and FY21 by 18%.
q Moreover, the lock-down has also stalled execution for 9 days in March and almost a
month in Q1FY21 impacting the revenue of the company both in Q4FY20 and Q1FY21
q This would impact the EPS of the company by 18% and 37% during FY20 -21CL.
q That said Sadbhav has almost halved its group debt (Figure 51) on conclusion of its
landmark strategic deal with CPPIB-led InvIT (Figure 50).
q Also promoters have been bringing down their stock pledge by deleraging balance
sheet and replacing shares with land till 3QFY20 (Figure 39). However pledge has gone
up in 4Q due to fall in stock but we see enough cover with promoters.
Sadbhav concluded the
q The Sadbhav Infra (SIPL, a 69% subsidiary and 42% of SOTP) transformative InvIT deal
largest highway asset sale
shall open a window to future asset monetisation and making its EPC business, which
to the CPPIB-led private
trades at a PE of 1.3x FY20 ex-SIPL market value (Figure 60), asset-light.
InvIT
Figure 50

Sadbhav – Landmark deal done

Source: CLSA

Figure 51

Post the divesture process Sadbhav: post divesture change in debt

Sadbhav’s net debt will
decline from its current
Rs114bn to Rs54bn

Source: CLSA, Company,* u/c= under construction

15 April 2020 [email protected] 22

 Covid-19 curfew cuts E&C

Figure 52

We cut our execution Sadbhav (parent): income statement

estimate by 9%-23% in FY ends Mar31st, (Rs mn) FY18 FY19 FY20CL FY21CL FY22CL
FY20-21 which bring our Order Inflow 90,639 16,138 (1,486) 22,461 29,691
EPS down by 18%-37% y-o-y % 158.7% (82.2%) (109.2%) (1611.2%) 32.2%
Order Backlog 132,493 112,277 84,427 80,980 79,286
y-o-y % 72.4% (15.3%) (24.8%) (4.1%) (2.1%)

Net Sales ( Rs mn) 35,051 35,492 26,428 25,930 31,396

- Growth % 5.6% 1.3% (25.5%) (1.9%) 21.1%
Expense :
Net Materials 28,134 28,521 21,197 20,811 25,230
- % of Total Op. Income 80.3% 80.4% 80.2% 80.3% 80.4%
- Growth % 6.0% 1.4% (25.7%) (1.8%) 21.2%
Employee Cost 1,553 1,676 1,248 1,361 1,476
- % of Total Op. Income 4.4% 4.7% 4.7% 5.3% 4.7%
- Growth % 13.7% 7.9% (25.5%) 9.1% 8.4%
Other Expense 1,211 1,016 730 717 868
- % of Total Op. Income 3.5% 2.9% 2.8% 2.8% 2.8%
- Growth % (29.9%) (16.1%) (28.1%) (1.9%) 21.1%
Total Expense 30,899 31,213 23,176 22,889 27,573
EBITDA ( Rs mn) 4,151 4,279 3,252 3,041 3,823
-EBITDA margin% 11.8% 12.1% 12.3% 11.7% 12.2%
- Growth % 16.7% 3.1% (24.0%) (6.5%) 25.7%
Depreciation 980 958 1,016 1,075 1,141
EBIT 3,172 3,321 2,236 1,966 2,682
- EBIT margin % 9.0% 9.4% 8.5% 7.6% 8.5%
Interest & Other income 557 357 437 487 459
Interest Expense 1,567 1,103 958 889 800
PBT 2,162 2,575 1,714 1,565 2,342
- PBT margin % 6.2% 7.3% 6.5% 6.0% 7.5%
Total Taxes (44) 714 362 263 536
Tax rate 2.0% 27.7% 21.1% 16.8% 22.9%
Rec PAT 2,206 1,861 1,352 1,302 1,807
Extra ordinary Income/Exp. - 7.6 - - -
Rep. PAT 2,206 1,869 1,352 1,302 1,807
Rep PAT Margin 6.3% 5.3% 5.1% 5.0% 5.8%
- Growth % 17.4% (15.3%) (27.6%) (3.7%) 38.8%
Source: CLSA

15 April 2020 [email protected] 23

 Covid-19 curfew cuts E&C

Stalled execution for EPC IRB Infra (IRBI.BO) – BUY CMP – Rs 66, target price Rs166
projects brings our EPS q IRB has timely deleveraged its balance sheet during 4QFY20 (Figure 54) with its
down by 4%-7% for FY20- landmark 51:49 private InvIT deal (Figure 53) with Government of Singapore (GIC).
21CL This deal shall also open window of future project injection into the InvIT making its
business model scalable and sustainable.
q Owing to Covid-19 Pandemic, some key bids at NHAI has been postponed.
q Moreover, the lock-down has also stalled execution of EPC projects for 9 days in
March and likely almost a month in Q1FY21 impacting the revenue of the company
both in Q4FY20 and Q1FY21. We expect company to receive force majeure claims for
the lock-down during FY21, restricting EPS hit.
q IRB has taken only a partial moratorium in March 2020 interest and expects to take the
same in April as well, if toll-ban continues beyond April 14th.
q Slowdown in EPC execution and loss of profit in toll business would impact the EPS of
the company by 7% and 11% during FY20 -21CL.
GIC invested Rs44bn / q Key to track for IRB is that when does NHAI and Maharashtra state allow tolling and
US$621bn in a private InvIT start of toll-ways concession by NHAI.
with IRB to take out debt of q The stock trades at a compelling valuation, at a 60% discount to our SoTP, a 5x
Indian banks and reduce FY20CL PE
IRB’s equity commitment
Figure 53

IRB Infra – Landmark GIC deal proves asset value

Source: CLSA

Figure 54

Leverage is expected to fall IRB Infra: pre and post InviT leverage
63% post IRB-GIC InviT

Source: CLSA

15 April 2020 [email protected] 24

 Covid-19 curfew cuts E&C

Figure 55

We cut our execution IRB: income statement

forecast 19%-26% for FY ends Mar31st, (Rs mn) FY18 FY19 FY20CL FY21CL FY22CL
FY20-21 which will bring
our EPS down by 7%-11% -Construction 38,561 46,019 54,831 48,992 57,936
-BOT 17,898 21,052 17,039 18,052 21,181
Total Income 56,459 67,070 71,870 67,044 79,117
Construction Direct &other 27,195 35,121 48,691 34,784 41,135
expenses
Operation & Maintenance Exp. BOT 2,957 2,576 2,405 2,991 3,507
(3%) 19% 7% (7%)
EBIDTA 26,307 29,373 31,242 29,268 34,476
EBITDA Margin % 47% 44% 43% 37% 35%
-Construction EBITDA 11,367 10,898 15,505 14,208 16,801
EBITDA Margin % 29% 24% 28% 28% 29%
-BOT EBITDA 14,941 18,475 15,737 15,060 17,675
-EBITDA Margin % 83% 88% 92% 83% 83%
Depreciation & Amortization 5,440 5,395 4,584 6,256 6,709
-Construction 676 428 412 664 748
-BOT 4764 4967 4172 5592 5961
EBIT 20,867 23,978 26,658 23,012 27,767
-Construction 10691 10469 15093 13544 16053
-BOT 10176 13508 11565 9469 11714
Other Income 1861 1956 1921 1789 1789
-Construction 1178 1079 834 834 834
-BOT 684 877 1087 955 955
Interest Expense 9667 11201 15638 19150 21421
-Construction 3186 3149 3851 5006 5862
-BOT 6480 8051 11787 14144 15558
Financial Exp. Net (7,805) (9,245) (13,716) (17,361) (19,632)
-Construction (2,009) (2,070) (3,017) (4,172) (5,028)
-BOT (5,797) (7,174) (10,700) (13,189) (14,604)
PBT 13062 14733 11711 6605 8135
-Construction 8682 8399 11856 9372 11026
-BOT 4379 6334 (144) (2766) (2890)
Less: Provision for tax 5132 6234 4712 2045 2642
-Construction 2,797 3,185 3,294 2,155 2,536
-BOT 2,335 3,048 1,417 (111) 106
TAX Rate 39% 42% 40% 35% 27%
-Construction 32% 38% 28% 23% 23%
-BOT 53% 48% (982%) 4% (1%)
PAT 7,930 8,500 7,000 4,560 5,493
PAT Margin % 14% 13% 10% 7% 7%
-Construction 5885 5214 8561 7216 8490
PAT Margin % 15% 11% 16% 15% 15%
-BOT 2045 3285 (1562) (2656) (2997)
PAT Margin % 11% 16% (9%) (15%) (14%)
Less Minority Interest - - - - -
Rec. PAT and after MI 7,930 8,500 7,000 4,560 5,493
Extra-ordinary items 1,260 - - -
Reported PAT 9,190 8,500 7,000 4,560 5,493
Source: Company, CLSA

15 April 2020 [email protected] 25

 Covid-19 curfew cuts E&C

Prefer builders and select developers: L&T, JKIL

and IRB
q The government has little choice but to pump prime economy with its own/CPSE
capex, as corporate tax cut failed to revive capex. Buy early-cycle plays trading at 10-
year low multiples such as L&T, JKIL, IRB, Sadbhav & NCC after 15-45% price
corrections in a month.
q We see government having robust pipeline of projects in its US$1.4tr National Infra
Pipeline (Peep at US$1.4tn infra Capex, Figures 68-77) across highways, railways and
urban infrastructure such as Rapid rail (Rapid rail, a US$14bn project) and metro rails.
q The key beneficiaries of the ensuing cyclical upturn post-Covid-19 are asset-light E&C
firms with healthy balance sheets and asset owners.
q The impact on core earnings of India’s E&C companies is limited due to its insular
business nature driven by the government.
q We expect these stocks to re-rate on peaking of Covid19 cases (Figure 5). Buy L&T (LT
IN) given its improving capital allocation, expanding ROE and likely large dividend from
its divestiture; Sadbhav (SADE IN) & IRB on asset churn in 1Q2020 (Landmark GIC deal
proves asset value); and J Kumar (JKIL IN) and NCC (NJCC IN) as an urban infrastructure
plays.

Figure 56

L&T E&C (incl HC): price to earnings

E&C (Inc. HC) Price P/E Average +1std -1 std

37

32

27 +1sd 26.70x

22
avg 20.17x

17
-1sd13.65x
12
L&T’s E&C PE has fallen
below -1 std. of its long 7
time average. It is still
above its low of 9x during
the global financial crisis of
2008 Source: CLSA, Company

15 April 2020 [email protected] 26

 Covid-19 curfew cuts E&C

Figure 57

BHEL is trading at almost 2 BHEL: price to earnings (x)

std. below its average PE (X)
ratio of 23x due to delays in 55.0
decision making to divest 50.0
its strategic stakes and the 45.0
continued down-cycle in its 40.0
core power business
35.0 +1sd 33.71x
30.0
25.0 avg 25.94x

However the stock is deep 20.0

value trading at a 2.3x -1sd 18.17x
15.0
EV/Ebitda fo FY21CL
10.0
5.0
Apr 17 Oct 17 Apr 18 Oct 18 Apr 19 Oct 19 Apr 20

Source: CLSA

Figure 58

JKIL offers the best proxy JKIL: price to earnings

to the urban infrastructure (X)
theme and it is the most 18.0
inexpensive E&C stock at 16.0
3.3x FY20CL earnings
14.0
+1sd 12.73x
12.0

10.0
avg 8.83x
8.0

6.0
-1sd 4.93x
4.0

2.0
Apr 17 Oct 17 Apr 18 Oct 18 Apr 19 Oct 19 Apr 20

Source: CLSA

Figure 59

NCC offers a diversified NCC: price to earnings

play on buildings, water and (X)
22.0
road Capex. However the
stock paid the price for the 20.0
company’s high dependence 18.0
on the state of Andhra 16.0
Pradesh which has +1sd 15.04x
14.0
cancelled many contracts
recently 12.0 avg 11.87x

10.0
-1sd 8.7x
8.0
6.0
4.0
2.0
Apr 17 Oct 17 Apr 18 Oct 18 Apr 19 Oct 19 Apr 20

Source: CLSA

15 April 2020 [email protected] 27

 Covid-19 curfew cuts E&C

Figure 60

A lack of new order wins, Sadbhav: price to earnings

and fears of a promoter (X)
family split have de-rated 40.0
Sadbhav 35.0
+1sd 32.64x
30.0

25.0 avg 25x

The conclusion of the
strategic divestment deal 20.0
-1sd 17.37x
with CPPIB-led InvIT and
15.0
likely order wins post
deleveraging should 10.0
support a rerating
5.0

0.0
Apr 17 Oct 17 Apr 18 Oct 18 Apr 19 Oct 19 Apr 20

Source: CLSA

Figure 61

IRB has de-rated on a lack IRB Infrastructure: PE ratio

of new BOT toll asset wins (X)
which depleted the visibility 12.0
of its construction business 11.0
10.0 +1sd 9.77x

Its recent strategic deal to 9.0

partner with GIC and 8.0
avg 7.69x
winning of the Mumbai-
7.0
Pune expressway
concession should drive a 6.0
-1sd 5.62x
rerating 5.0
4.0
3.0
Apr 17 Oct 17 Apr 18 Oct 18 Apr 19 Oct 19 Apr 20

Source: CLSA

15 April 2020 [email protected] 28

 Covid-19 curfew cuts E&C

Figure 62

L&T SOTP valuation

Parts L&T's Rationale Total Value L&T value (Rs % of
Stake (Rsmn) (Rs mn) per Total
sha
re)
EPC business 1,213,77 1,213,778 866 61.9%
8
-EPC (ex-Hydrocarbon) 100.0% Core businesses -14x 1-yr forward PER 1,072,84 1,072,844 766 54.7%
4
-L&T Hydrocarbon 100.0% Core businesses -12x 1-yr forward PER 140,935 140,935 101 7.2%

L&T Listed Subsidiaries 673,141 468,978 335 23.9%

-L&T Technology Services 74.7% At 15% discount to our CLSA TP 135,476 101,255 72 5.2%
-L&T Infotech 74.6% At 15% discount to BBG consensus TP 262,112 195,483 139 10.0%
-L&T Finance Holdings 63.9% At 25% discount to BBG consensus TP 162,936 104,051 74 5.3%
-Mindtree 60.6% At 15% discount to BBG consensus TP 112,616 68,189 49 3.5%
Infra development businesses 283,890 278,865 96 6.9%
-L&T IDPL - Road SPVs 97.4% At 15% discount to 1.2x 1-yr forward BV of 35,497 34,590 25 1.8%
Investment
-L&T Realty (Urban Infra) 100.0% 39,313 35,195 25 1.8%
-Crescent Bay 60.0% DCF with 14.9% CoE 10,294 6,177 4 0.3%
-Powai 100.0% DCF with 14.9% CoE 18,012 18,012 13 0.9%
-Sea Woods 100.0% DCF with 14.9% CoE 11,006 11,006 8 0.6%
-L&T Power Development 100.0% Based on SOTP 45,456 45,456 32 2.3%
-Nabha Power 100.0% At FY19 BV of Investment of L&T PDPL 32,451 32,451 23 1.7%
-L&T Uttaranchal Hydro Power 100.0% At FY19 BV of Investment of L&T PDPL 13,025 13,025 9 0.7%
-L&T Metro (Hyderabad) 100.0% At 10% discount to DCF - CoE of 14.3% 19,516 19,516 14 1.0%
Other Investments NA 144,108 144,108 103 7.3%
-Other Subs NA At 1.5x FY19 Book value 32,564 32,564 23 1.7%
- Divestment of Electrical & Automation 100.0% Post tax equity value of the divesture to 111,544 111,544 80 5.7%
Schneider

Total 2,282,35 2,073,165 1,400 100.0

2 %
Source: CLSA

Figure 63

JKIL: SOTP valuation

SOTP Value Stake Valuation Multiple Total Value J Kumar Rs per
(%) Basis (Rs mn) Infraprojects Value Share
(Rs mn)
E & C Business 100% At 7x 1 yr fwd earnings 7.0 17,395 17,395 230
Source: CLSA

Figure 64

BHEL: SOTP valuation

Parts Stake % Valuation Basis Total BHEL Rs per % of
Value Value Share Total
(Rs mn) (Rs mn)
Parent Business 100% At 14x 1-year forward PER 137,859 137,859 40 98%
Power Utility JVs 26% At 0.5x FY18x BV of Investment 12,720 3,307 1 2%
Total Value 150,579 141,166 40 100%
Source: CLSA

15 April 2020 [email protected] 29

 Covid-19 curfew cuts E&C

Figure 65

Sadbhav: SOTP valuation

Parts Stake Valuation Total Value Sadbhav Value Rs per
(%) Basis (Rs mn) (Rs mn) Share
E & C Business 100% 7x 1 year forward earnings 13,008 13,008 76
SIPL (BOT/HAM Assets) 69% At 60% Discount to BBG TP 13,435 9,277 54
SOTP Value 26,443 22,285 130
Source: CLSA

Figure 66

NCC: SOTP valuation

SOTP Value Stake Valuation Multiple Total NJCCprojects Rs per
(%) Basis Value Infra Value Share
(Rs (Rs mn)
mn)
E & C Business - Domestic At 7x one year forward earnings 7.0 29915 29915 54
E&C Business - International At 0.3x Book Value of Investments 0.3 945 284 1

NCC Infra 68% At 0.5x Investment Value 0.5 1350 914 2

NCC Urban Infra 80% At 0.5x Investment Value 0.5 3458 2767 5
NCC Tellapur City At 0.7x Investment Value 0.7 242 242 0
Other Investment At 0.8x Investment Value 0.8 1343 1074 2
Total 37254 35196 63
Source: CLSA

Figure 67

IRB: SOTP valuation

Parts Stake Valuation Total Value Rs per Share
(%) Basis (Rs mn)
Operating Assets 3,393 (14)
-Ahmedabad Vadodara 100% DCF at CoE of 15.2% (6,611) (19)
-Thane Ghodbunder Road 100% DCF at CoE of 13% 551 2
-Pune Nashik 100% DCF at CoE of 13% 1,019 3

Under Cons. / Tolled / Private InvIT assets 28,015 80

-Agra Etawah Road 100% DCF at CoE of 15.2% 3,470 10
-Solapur Yedeshi 100% DCF at CoE of 14.1% 3,567 10
-Kaithal Rajasthan Border 100% DCF at CoE of 14.6% 2,200 6
-Udaipur-Gujarat border 100% DCF at CoE of 14.1% 1,043 3
-Gulabpura-Chhitorgarh 100% DCF at CoE of 14.1% 5,018 14
-Kishangarh-Gulabpura 100% DCF at CoE of 14.1% 19 0
-Yedeshi Aurangabad 100% DCF at CoE of 14.1% 7,698 22
-Goa Kundapur 100% DCF at CoE of 14.1% 5,833 17
-Hapur - Moradabad 100% DCF at CoE of 14.1% (833) (2)

Under Construction Assets 4,575 5

-Vadodara - Mumbai 100% DCF at CoE of 13.5% 1,764 5
Total BOT Business 35,983 71
E & C Business 100% 4x 1 yr fwd P/E 27,812 79
Real Estate 66% At Book Value 874 2
Singhdurh Airport 100% At Book Value 2,457 7
Investment in InvIT 100% Stake of 15.45% at CMP 2,529 7
SoTP Value 69,654 166
Source: CLSA

15 April 2020 [email protected] 30

 Covid-19 curfew cuts E&C

Annexure: NIP
Figure 68

A likely miss in FY21-22 NIP annual phasing

Capex bump-up may 20 19.5
Rs tn 19.0
smoothen the decline over
FY22-25 as visibility for
18
some of the large projects
such as the bullet train,
river-linking and rail freight 15 13.8
13.6
corridors improve 12.8
13
11.1

10
The annual phasing shown
in the chart does not
8
include projects worth
Rs12.6tn, awaiting details
from states like Gujarat and 5
the incorporation of Power FY20 (est.) FY21 (P) FY22 (P) FY23 (P) FY24 (P) FY25 (P)
CPSE Capex Source: CLSA

Figure 69

The NIP aims to take the NIP Capex vs previous five year plan
Capex cycle into a higher 25
Rs tn Centre State Private Total
orbit to address the
infrastructure deficit, 19.5 19.0
improve the quality of life 20
of citizens and businesses 4.2 4.0
and India’s ranking globally 13.6 13.8
15 12.8
11.1
10.2 10.0 2.6 7.4 6.7 3.6
8.5 9.2 3.9
10
6.3 7.0 2.5 2.5 4.1
2.6 5.5 4.1
5.3 3 3.7
2 2.3 3.8 3.7 3.1
5 1.5 4.3
3.5 7.9 8.3
2.4 2.7 3 5.5 6.1 5.2
3.9 3.8 3.9
1.4 1.6 1.7 2 2.3
0
FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21P FY22P FY23P FY24P FY25P

Source: CLSA

Figure 70

The central government NIP: split by agency

may have to up its share
from the designed 39% to
c.50% if this pipeline has to
be achieved on-the-ground

Source: CLSA

15 April 2020 [email protected] 31

 Covid-19 curfew cuts E&C

Figure 71

We await clarity on NIP: split by stage of project

conceptual and unclassified
projects, which account for
39% of the NIP

Source: CLSA

Figure 72

Construction heavy sectors NIP: split by sectors

such as nuclear and hydro
power, railways, roads and
urban infrastructure
dominate the NIP

Source: CLSA

Figure 73

The top three domains are NIP: split by sub-sectors

construction heavy and
should help the economy. . .

. . . consisting of EPC
contractors, steel, cement,
transport and banks

Source: CLSA

15 April 2020 [email protected] 32

 Covid-19 curfew cuts E&C

Figure 74

India’s FY19-25 (six years) NIP sector breakup

Capex design is not Sectors (Rs bn) XIth Plan (Revised XIIth Plan (Revised National
comparable to the earlier 5- FY07-12) FY12-17E) Infrastructure Pipeline
year plan on duration (FY19-25P)
and. . . Rs bn US$ bn @ % Rs bn US$ bn @ % Rs bn US$ bn %
Rs Shar Rs Shar @ Rs Shar
50/US$ e 55/US$ e 71/US$ e
Electricity - 7,285 146 30% 15,017 273 27% 13,301 187 13%
. . . as it includes a wider conventional
scope of projects such as Renewable Energy 892 18 4% 3,186 58 6% 9,295 130 9%
rural and urban housing Roads and Bridges 4,531 91 19% 9,145 166 16% 19,639 276 19%
(PMAY), industrial Capex Telecommunications 3,850 77 16% 9,439 172 17% 3,205 45 3%
and others Railways 2,012 40 8% 5,192 94 9% 13,685 192 13%
MRTS 417 8 2% 1,242 23 2% 16,290 229 16%
Irrigation (incl. 2,435 49 10% 5,044 92 9% 7,727 108 8%
Watershed)
Water Supply and 1,208 24 5% 2,553 46 5% 3,618 51 4%
Sanitation
This lofty goal, which lays a Ports (+ILW) 445 9 2% 1,978 36 4% 1,009 14 1%
strong foundation for the Airports 363 7 1% 877 16 2% 1,434 20 1%
next Capex cycle, can only Storage 179 4 1% 584 11 1% 606 8 1%
be achieved if. . . Oil and Gas pipelines 625 13 3% 1,489 27 3% 1,947 27 2%
Rural infrastructure 4,110 58 4%
(Water, Roads,
. . . out-of-the box funding Housing)
ideas, administrative reform Social infrastructure 3,567 50 3%
and a higher CPSE share in Industrial infrastructure 3,075 43 3%
the Capex is achieved Grand Total 24,243 485 100 55,747 1,014 100 102,507 1,438 100
% % %
Source: CLSA

15 April 2020 [email protected] 33

 Covid-19 curfew cuts E&C

Figure 76

NIP sector wise split

Particulars (Rs Bn) FY20 FY21 FY22 FY23 FY24 FY25 NIP Share of
(Total) sub-
segment
Compared to the previous Electricity 1,152 1,407 1,293 1,148 1,065 974 13,301
five-year plan, electricity Centre 497 653 654 633 600 539 3,575 27%
Capex under NIP is 11% States 593 682 578 466 421 394 3,134 24%
less in spite of NIP being for Private 62 72 61 49 44 41 330 2%
the period of six years Phasing Awaited 6,262 47%
Renewable Energy 305 1,510 1,440 1,700 2,170 2,170 9,295
Centre 0 0 0 0 0 0 0 0%
States 0 0 0 0 0 0 0 0%
Private 305 1,510 1,440 1,700 2,170 2,170 9,295 100%
Phasing Awaited 0 0%
However, road and bridge Roads and Bridges 3,244 3,697 3,438 2,369 2,294 3,249 19,639
Capex is expected to be Centre 811 924 859 592 574 812 4,573 23%
115% more compared to States 1,168 1,331 1,238 853 826 1,170 6,585 34%
the revised 12th five-year Private 1,265 1,442 1,341 924 895 1,267 7,134 36%
plan. Phasing Awaited 1,348 7%
Digital/Telecom 839 638 554 396 390 389 3,205
Centre 201 153 133 95 94 93 769 24%
States 42 32 28 20 19 19 160 5%
Private 596 453 393 281 277 276 2,276 71%
Phasing Awaited 0 0%
Railways 1,332 2,625 3,094 2,742 2,214 1,679 13,685
Centre 1,159 2,284 2,691 2,385 1,926 1,460 11,906 87%
States 13 26 31 27 22 17 137 1%
Private 160 315 371 329 266 201 1,642 12%
Phasing Awaited 0 0%
MRTS Capex under NIP is MRTS 2,948 4,135 3,269 1,615 1,462 1,090 16,290
12x more than what was Centre 914 1,282 1,013 501 453 338 4,501 28%
planned under the last five States 2,004 2,812 2,223 1,098 994 741 9,873 61%
year plan. . . Private 29 41 33 16 15 11 145 1%
Phasing Awaited 1,772 11%
Irrigation (incl. 1,017 1,694 1,577 1,076 925 642 7,727
Watershed)
Centre 224 373 347 237 204 141 1,525 20%
States 793 1,321 1,230 840 722 501 5,407 70%
Private 0 0 0 0 0 0 0 0%
. . . out of which 11% is Phasing Awaited 795 10%
where phasing is awaited Water Supply and 362 607 1,007 842 800 0 3,618
Sanitation
Centre 275 461 766 640 608 0 2,750 76%
States 87 146 242 202 192 0 868 24%
Private 0 0 0 0 0 0 0 0%
Phasing Awaited 0 0%
Ports (+ILW) 121 161 188 153 71 93 1,009
Centre 47 63 73 60 28 36 307 30%
States 60 81 94 76 36 46 393 39%
Private 13 18 21 17 8 10 86 9%
Phasing Awaited 223 22%
Source: CLSA, NIP

15 April 2020 [email protected] 34

 Covid-19 curfew cuts E&C

Figure 77

NIP sector wise split

Particulars (Rs Bn) FY20 FY21 FY22 FY23 FY24 FY25 NIP Share of
(Total) sub-
segment
Compared to the previous Airports 188 217 248 213 253 50 1,434
five-year plan, airport Centre 43 50 57 49 58 12 269 19%
Capex under NIP is 63% States 72 82 94 81 96 19 444 31%
higher Private 73 84 97 83 99 20 456 32%
Phasing Awaited 264 18%
Oil and Gas pipelines 275 437 484 415 229 106 1,947
Centre 204 323 358 307 169 78 1,440 74%
States 30 48 53 46 25 12 214 11%
Private 41 65 73 62 34 16 292 15%
Phasing Awaited 1 0%
Storage 89 82 74 59 56 54 606
Centre 48 44 40 32 30 29 224 37%
States 41 38 34 27 26 25 191 31%
Private 0 0 0 0 0 0 0 0%
76% of the NIP for rural Phasing Awaited 191 32%
infrastructure is to be Rural infrastructure 1,036 1,163 1,099 271 271 271 4,110
implemented by the central (Water, Roads,
government Housing)
Centre 787 884 835 206 206 206 3,123 76%
States 249 279 264 65 65 65 986 24%
Private 0 0 0 0 0 0 0 0%
Phasing Awaited 0 0%
The majority of spending is Health and family 345 437 431 179 94 64 1,686
being done by the state welfare
governments in social Centre 100 127 125 52 27 18 449 27%
infrastructure States 245 310 306 127 67 45 1,100 65%
Private 0 0 0 0 0 0 0 0%
Phasing Awaited 137 8%
Higher Education 132 185 227 190 172 53 1,183
However, Capex is Centre 50 70 86 72 65 20 364 31%
expected to fall from FY23 States 82 115 141 118 106 33 594 50%
through FY25 Private 0 0 0 0 0 0 0 0%
Phasing Awaited 226 19%
Others in Social 78 103 110 95 88 73 697
Centre 39 52 55 47 44 36 273 39%
States 39 52 55 47 44 36 273 39%
Private 0 0 0 0 0 0 0 0%
Phasing Awaited 151 22%
Industrial infrastructure Industrial 172 407 429 342 228 104 3,075
spending will be done infrastructure
mostly by the central Centre 86 203 214 171 114 52 841 27%
government and private States 17 41 43 34 23 10 168 5%
players. . . . Private 69 163 172 137 91 42 673 22%
Phasing Awaited 1,393 45%
Grand Total 13,635 19,504 18,961 13,803 12,782 11,059 102,243
. . . however for 45% of the Total Centre 5,485 7,946 8,308 6,079 5,200 3,871 36,889 36%
total Capex, phasing is still Total State 5,535 7,394 6,653 4,127 3,684 3,134 30,527 30%
awaited Total private 2,615 4,164 4,000 3,598 3,898 4,054 22,328 22%
Phasing Awaited 0 0 0 0 0 0 12,498 12%
Source: CLSA, NIP

15 April 2020 [email protected] 35

 Covid-19 curfew cuts E&C

Valuation details - Bharat Heavy Electricals Ltd BHEL IB

Our 12-month target price is based on 12x one-year forward PE multiple for the
parent business and the power utility JV at its 0.5x its book value.

Investment risks - Bharat Heavy Electricals Ltd BHEL IB

Delay in government divestment and revival of the India thermal power market is a
risk. A slow turnaround in power orders and a delay in pick-up in industrial capex
are also downside risks. Other risks include aggressive bidding due to increased
competition, volatile material prices, and employee resistance to government
divestment.

Valuation details - IRB Infrastructure Developers Ltd IRB IB

We have valued IRB through a sum-of-the parts analysis based on the DCF of each
project assuming respective concession periods. We have valued the construction
business at 4x P/E . Our DCF-based target price for the stock accounts for new
projects won.

Investment risks - IRB Infrastructure Developers Ltd IRB IB

Key investment factors to weigh on the share price include lower traffic and toll
leakage, project delays, toll rate risk on lower inflation, delay in project funding, and
execution challenges.

Valuation details - J Kumar Infraprojects Ltd JKIL IN

We reach our one-year target for JKIL by applying a 7x forward PE multiple. This is
a ~25-30% (midcap) discount to L&T's E&C/ Sadbhav Engineering's target PE
multiple. We believe this is rather conservative for a company like JKIL as it has a
strong order book, an asset-light model, and superior and more consistent earnings
growth and quality than peers.

Investment risks - J Kumar Infraprojects Ltd JKIL IN

Major investment risks include a delay in the pickup of the investment cycle,
execution logjams, increasing receivable days and geographic concentration of the
company.

Valuation details - Larsen & Toubro Ltd LT IB

In our SOTP-based target price for the company, we use a one-year forward PE
multiple (based on a 25% discount to capital goods comps) to derive a core E&C
business value. The hydrocarbon business is excluded from the E&C business now
as per company segmentation and valued separately using a one-year forward PE
multiple. Finance, road SPVs, and other subsidiaries are valued at a multiple to the
book value or at a discount to our coverage target price or Bloomberg Consensus
target price. Divested businesses have been valued at the equity consideration
expected to be received.

Investment risks - Larsen & Toubro Ltd LT IB

About 25% of L&T's order backlog is from overseas orders. Strict labour laws and
stringent liquidated damages clauses in the tenders can lead to cost overruns.
Competitive intensity in the domestic EPC space has led to aggressive pricing; if
competition intensifies further, there could be downside to Ebitda margins.
Divestment of assets may be delayed if economic growth does not revive, posing a
risk to valuations.

15 April 2020 [email protected] 36

 Covid-19 curfew cuts E&C

Valuation details - Nagarjuna Construction Co Ltd NJCC IN

We value NJCC's E&C business at 7x PE multiple on 1-yr fwd earnings for the
domestic business, which is a 50% discount to the industry leader L&T (mid-cap
discount), and approx 15-20% discount to its own trading multiple (mid-cycle
earnings discount). The other investments of the company including Roads, Urban
Infra, Tellapur city and others are valued at 0.5-0.8x book value of investments.

Investment risks - Nagarjuna Construction Co Ltd NJCC IN

Key risks for the company include heavy investments the company has done in the
infra and the real estate business over the years, as they have depressed the RoEs.
This has increased the company's leverage vis-a-vis its peers. For the E&C business,
the major risks include delay in execution.

Valuation details - Sadbhav Engineering Ltd SADE IN

We value the company at 7.5x PE on its one year forward earnings. SEL’s stake of
69% in SIPL (post-IPO) is valued at 50% hold-co discount to its Bloomberg
Consensus Target Price.

Investment risks - Sadbhav Engineering Ltd SADE IN

Execution delays, delay in project funding, slower growth in traffic and toll rate risk
on lower inflation are key risks for the company.

15 April 2020 [email protected] 37

 Important disclosures E&C

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Companies mentioned
Ashoka Buildcon (N-R)
AT S Infratech (N-R)
Bharat Heavy Elec (BHEL IB - RS22.1 - BUY)
Coal India (COAL IS - RS145.9 - BUY)
CPPIB (N-R)
Dilip Buildcon (N-R)
GIC Private Limited (N-R)
Hindustan Construction (N-R)
IRB Infra (IRB IB - RS65.9 - BUY)
J Kumar Infra (JKIL IN - RS79.8 - BUY)
Krishnagiri Thopur (N-R)
Krishnagiri Walajahpet (N-R)
L&T Finance (N-R)
L&T IDPL (N-R)
L&T infotech (N-R)
L&T metro (N-R)
L&T power development (N-R)
L&T Realty (N-R)
L&T Tech (LTTS IS - RS1,155.8 - BUY)
Larsen & Toubro (LT IB - RS865.7 - BUY)
MindTree (N-R)
MMRDA (N-R)
Nagarjuna (NJCC IN - RS23.9 - BUY)
NTPC (NTPC IS - RS88.7 - BUY)
Sadbhav (SADE IN - RS26.4 - BUY)
Schindler (N-R)
Thermax (N-R)

Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our
own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will
be directly or indirectly related to the specific recommendation or views contained in this research report.

15 April 2020 [email protected] 38

 Important disclosures E&C

Important disclosures
Recommendation history of IRB Infrastructure Developers Ltd IRB IB

Date Rec Target Date Rec Target

LATEST BUY 166.00 31 Oct 2018 BUY 250.00
18 Mar 2020 BUY 180.00 08 Jun 2018 BUY 330.00
07 Aug 2019 BUY 225.00 29 Apr 2017 BUY 320.00
Source: CLSA

Recommendation history of Larsen & Toubro Ltd LT IB

Date Rec Target Date Rec Target

LATEST BUY 1,400.00 13 Nov 2017 BUY 1,500.00
18 Mar 2020 BUY 1,550.00 29 Jul 2017 BUY 1,400.00
21 May 2018 BUY 1,730.00 30 May 2017 BUY 1,413.33*
01 Feb 2018 BUY 1,680.00 19 Apr 2017 BUY 1,326.67*
06 Jan 2018 BUY 1,565.00
Source: CLSA; * Adjusted for corporate action

15 April 2020 [email protected] 39

 Important disclosures E&C

Recommendation history of Nagarjuna Construction Co Ltd NJCC IN

Date Rec Target Date Rec Target

LATEST BUY 63.00 14 Nov 2018 BUY 135.00
18 Mar 2020 BUY 79.00 12 Aug 2018 BUY 150.00
10 Feb 2020 BUY 91.00 15 Feb 2018 BUY 160.00
06 Nov 2019 BUY 105.00 01 Nov 2017 BUY 130.00
01 Jun 2019 BUY 138.00 24 May 2017 BUY 110.00
27 May 2019 BUY 145.00 19 Apr 2017 BUY 115.00
13 Feb 2019 BUY 140.00
Source: CLSA

Recommendation history of Sadbhav Engineering Ltd SADE IN

Date Rec Target Date Rec Target

LATEST BUY 130.00 16 Nov 2018 BUY 390.00
18 Mar 2020 BUY 160.00 14 Aug 2018 BUY 450.00
17 Feb 2020 BUY 220.00 06 Jan 2018 BUY 500.00
19 Aug 2019 BUY 270.00 01 Nov 2017 BUY 400.00
01 Jun 2019 BUY 320.00 17 Aug 2017 BUY 360.00
15 Feb 2019 BUY 340.00
Source: CLSA

15 April 2020 [email protected] 40

 Important disclosures E&C

Recommendation history of J Kumar Infraprojects Ltd JKIL IN

Date Rec Target Date Rec Target

LATEST BUY 230.00 06 Jan 2018 BUY 405.00
18 Mar 2020 BUY 260.00 12 Aug 2017 BUY 355.00
14 Nov 2018 BUY 315.00 10 May 2017 BUY 402.00
10 Aug 2018 BUY 390.00 19 Apr 2017 BUY 340.00
14 Feb 2018 BUY 440.00
Source: CLSA

Recommendation history of Bharat Heavy Electricals Ltd BHEL IB

Date Rec Target Date Rec Target

LATEST BUY 40.00 26 Jul 2018 SELL 68.00
18 Mar 2020 BUY 55.00 30 May 2018 SELL 79.00
12 Feb 2020 BUY 65.00 09 Feb 2018 SELL 89.00
30 Oct 2019 BUY 67.00 08 Nov 2017 SELL 80.00
11 Aug 2019 SELL 54.00 11 Aug 2017 SELL 83.33*
28 May 2019 SELL 63.30 30 May 2017 SELL 100.00*
06 Feb 2019 SELL 56.00
Source: CLSA; * Adjusted for corporate action

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