India: 68 Years After The British, Still Seeking Roads

Construction sector at the cusp of recovery after a dismal 4-5 years. New government has taken decisive measures to resolve various policy bottlenecks in infrastructure. We see multi-year opportunity led by:  Improvement in order inflow prospects in roads, railways, urban infra (metro, water sewage plants) and  large infra projects like DFCC, DMICDC  

Critical issues of environmental clearance, land acquisition and financing being effectively addressed  

Strong track record of key ministers handling Roads, Railways and Power & Coal 

Reduced competitive intensity and impending interest rate cuts to result in improved earnings growth for contracting companies  

To identify winners and avoid pitfalls of the previous cycle, we rated companies on their balance sheet strength, cash flow generation over the cycle and fiscal discipline (exposure to BOT segment)   We believe despite the up move in EPC companies over the last 9 months, there are a few high  quality companies which still offer 25-50% upside based on our moderate assumptions of revenue growth and margin  

We initiate coverage with BUY rating on J Kumar Infra, KNR Constructions, Ahluwalia Contracts and Simplex Infra. Maintain BUY on Sadbhav Engg. L&T remains our large cap top pick .