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Global Investment HouseStrong investment boom, favorable regulatory policies, rapidly growing middle class and emergence as low cost manufacturing destination has led to accelerated economic growth in India. India's GDP growth rates are the highest among the major economies of the world. The gross domestic product (GDP) from construction activity at constant (1999-2000) prices has increased from Rs.1,052bn in FY2000 to Rs.1,775bn in FY2006. According to recent estimates by the Central Statistical Organisation (CSO), GDP from construction sector is expected to increase 9.4% during FY2007 to around Rs.1,941.84bn. The GDP growth from construction has increased at a faster rate than the overall growth in real GDP. As a result, the share of construction in real GDP has increased from 5.9% in FY2000 to an estimated 6.8% in FY2007.

The government projects a total investment of US$456bn in 11th five year plan (2007-12) for infrastructure development. The resources will be mobilised from public sector funding and private investment. Of the total projected investment, it is estimated that power could get 28%, roads 19.7%, railways 14.5% and telecom about 12.3%. Power sector can see investment of Rs5,257.2bn in the 11th plan. Public spending would continue to dominate this investment with private sector expected to contribute Rs200bn with a projected growth rate of 15%. Road sector can see investment of Rs3,686.5bn in the same period with private sector playing important role in the sector. It is expected that overall spending on national highways would grow by 5% per annum for the next five years. Investment in rural roads is also projected to grow at 8% per annum.

With an aim to improve and widen the reach of national highways, National Highways Development Project (NHDP), the largest highway project was undertaken by the country in a phased manner. NHDP Phase I and II envisage four / six laning of about 14,234 km of national highways at an estimated cost of Rs.650bn at 2004 prices. The government has approved upgradation of 4,035 km under NHDP Phase IIIA at an estimated cost of Rs.222.07bn as also taking advance action in the form of preparation of the detailed project reports (DPR) for the balance length of 7,078 km under NHDP Phase IIIB.

India has 12 major ports along the coastline of 7,517kms, 6 ports on east coastline and 6 on west and a number of minor ports. As per the government of India's estimate, Rs.574.5bn will be required to ramp up the capacity at major ports and Rs.359.3bn will be required to increase capacity at non major ports by 2011-12. Of the total investment, about Rs.688.4bn is expected through PPP (Public Private Partnership). Indian railways with 63,332 kms of network, 1.5mn employees, 440 BTKms and 615 BPKms of traffic is one of the largest rail networks of the world. Indian Railways has submitted a US$63bn investment roadmap for the 11th Five Year Plan period (2007-2012) for the dedicated freight corridor, rail gauge conversion and revamp of railway infrastructure through public-private partnerships.

Sustaining a GDP growth rate of 9% is not possible without complementing it with increase in supply of energy, electricity, coal, oil and gas and other fuels. It was envisaged that a capacity of about 78,577MW is feasible for addition during 11th plan period. The Working Group for power recommends a capacity addition of 82,200 MW for the 12th Plan based on scenario of 9% GDP growth rate and an elasticity of 0.8%. Such ambitious capacity addition would require huge investment. In 11th plan alone, an investment of over US$200bn is estimated. Approximately equal part of the investment will go into power generation and remaining half into transmission and distribution. An investment of about Rs.400bn is projected for the development of airports during the period 2006-07 to 2013-14, of which approximately Rs.310bn is envisaged from PPPs. The Planning Commission has recommended that the federal and state governments spend US$60bn on water resources including irrigation, flood control, restoration of water bodies and US$32bn on urban water supply and wastewater management during 2007-2012 period. The outlay under the Accelerated Irrigation Benefit Programme for the year FY07 was Rs.71.2bn, an increase of 58% over FY06 with target of 600,000 hectares for irrigation in this scheme.

Companies under coverage

We have covered seven companies in this report namely IVRCL Infrastructure and Projects Limited (IVRCL), Nagarjuna Construction Company Limited (NCC), Patel Engineering Limited (PEL), Subhash Infrastructures Limited (Simplex), Subhash Projects and Marketing Limited (SPML), Era Infra Engineering Limited (EIEL) and Gayatri Projects Limited (GPL).

IVRCL: The strong business momentum of IVRCL is expected to be driven by an order backlog of Rs.110bn which is 4.75x FY07 sales. Water continues to dominate the revenue of the company which is closely followed by building and industrial infrastructure space. Water and environment forms the lions share at 59.1% followed by building and industrial infrastructure at 18.2%, transportation at 13.6% and power & distribution at 9.1%. IVRCL has reported strong growth in its topline and bottom line for the past few years. Income grew at a CAGR of 43.9% during FY2004-2007 and stood at Rs.23.13bn at the end of Mar 31, 2007. During the same period, cost of construction expenses grew at a CAGR of 42.4% to Rs.19.5bn in FY07. This resulted in PBT and PAT growing at a CAGR of 76.1% and 53.4% to Rs.1.85bn and Rs.1.41bn respectively during the same period. IVRCL recorded revenue of Rs.23.44bn for the nine months ended December 31, 2007 as compared to Rs.13.22bn during the same period last year representing robust growth of 78.2%. Operating margins of the company stood at 9.82% for the first nine months of 2008 and was lower as compared to 9.92% recorded for 9MFY2007 due to increase in raw material prices of various inputs like cement and steel. We initiate our coverage of IVRCL with a Buy rating and value IVRCL's share at an intrinsic value of Rs.470.06 based on Sum of the Parts valuation method. The intrinsic value is higher than the current market price of Rs.413.5 (as on April 28, 2008) by 13.68%. NCC: The company has order book of around Rs.97.5bn as of January, 2008, which is 3.4x sales of FY07. Irrigation and water-related projects has made noteworthy contribution to the company's business mix in the past 24-30 months as large number of irrigation contracts have been awarded by the Andhra Pradesh government. International order book contributes Rs.12.7bn or 13% of the total order book of the company. NCC has an aggregate land bank of 444 acres, of which 201.1 acres is currently under development and 243 acres is for future development. NCC's performance has been quite remarkable for the past few years recording very robust numbers. Income from operations grew at a CAGR of 55.9% during the period 2004-2007 and stood at Rs.29bn at the end of Mar 31, 2007. During the same period, construction and other expenses grew at a CAGR of 54.9% to Rs.24.6bn in FY07. This resulted in PBT and PAT growing at a CAGR of 75.6% and 54.2% to Rs.2.18bn and Rs.1.15bn respectively during the same period. For 9MFY2008, NCC reported revenues of Rs.22.18bn as against Rs.20.03bn in 9MFY2007 posting 10.8% growth. Bottomline of the company saw a decline of 10.9% from Rs.1.22bn in 9MFY2007 to Rs.1.09bn in 9MFY2008. Operating margins stood at 11.4% for the first nine months of 2008 and was higher compared to 9.9% recorded by NCC for the first nine months of FY2007 due to better control on construction expenses. We initiate our coverage of NCC with a Buy rating and value NCC's share at an intrinsic value of Rs.248.3 based on the Sum of Parts valuation method. The intrinsic value is higher than the current market price of Rs.206.8 (as on April 28, 2008) by 20.07%.

PEL: As of December 2007, the total order book of PEL was Rs.55bn, which is 4.91x FY07 sales. The high margin hydro power projects contributed 56% of its order book followed by irrigation (20%) and roads and transportation (24%). Patel Realty, wholly-owned subsidiary of PEL is planning to monetise its historically held land bank. Patel Engineering has land bank of 1,001 acres spread across tier I and tier-II cities. PEL has reported strong growth in its topline as well as bottom line for the past few years. Income from operations grew at a CAGR of 41.4% during the period 2004-2007 and stood at Rs.11.19bn at the end of Mar 31, 2007. During the same period, construction expenses grew at a CAGR of 41.4% to Rs.8.75bn in FY07. This resulted in PBT and PAT growing at a CAGR of 63.2% and 68.9% to Rs.1.23bn and Rs.1.1bn respectively during the same period. PEL recorded revenue of Rs.8.28bn for the nine months ended December 31, 2007 as compared to Rs.7.06bn during the same period last year representing a growth of 17.2%. Operating margins stood at 16.2% for the first nine months of 2008 and was higher compared to 15.5% recorded by PEL for first nine months of FY2007 due to better share of high margin projects. We initiate our coverage of PEL with a Buy rating and value PEL's share at an intrinsic value of Rs.667.2 based on the Sum of Parts valuation method. The intrinsic value is higher than the current market price of Rs.575 (as on April 28,2008) by 16.03%.

Simplex: As of January 2008, Simplex has an order backlog of Rs.91.5bn, which is 5.3x FY07 sales. The current order book is to be executed over the next 2.5 years provides high income visibility for at least the next 2 years. The high margin overseas business has expanded from 7% of order backlog in FY06 to 27% as of January 2008 and is expected to go up to more than 30% by FY10E end. In addition, Simplex has a very strong presence in overseas markets like UAE and Qatar. Total income grew at a CAGR of 38.8% during the period 2004-2007 and stood at Rs.17.2bn at the end of Mar 31, 2007. During the same period, contract expenses grew at a CAGR of 36.9% to Rs.14.67bn in FY07. This resulted in PBT and PAT growing at a CAGR of 70.2% and 76.9% to Rs.701.6mn and Rs.537.1mn respectively during the same period. Simplex is managing its cost in proactive manner and focus on better margin projects lead to margin expansion in steady manner over the past four years. Simplex recorded revenue of Rs.18.69bn for the nine months ended December 31, 2007 as compared to Rs.11.34bn during the same period last year representing a growth of 64.9%. Operating margins stood at 10.6% for the first nine months of 2008 and was higher compared to 10.2% recorded by Simplex for first nine month of FY2007 due to better management of cost. We initiate our coverage of Simplex with a Buy rating and value Simplex's share at an intrinsic value of Rs.684.33 based on the DCF method. The intrinsic value is higher than the current market price of Rs.592 (as on April 28, 2008) by 15.6%.

SPML: The top gear performance of SPML is expected to be driven by an order backlog of Rs.35bn as of January 2008, which is 4.3x FY07 sales. The high margin water management and environment segment projects contributed 49.2% of its order book followed by power (36.3%) and infrastructure (14.6%). SPML has formed a 50:50 JV with Insituform Technologies Inc, USA for sewer and water pipeline rehabilitation project. Insituform is a global leader in the trenchless rehabilitation of pipes and holds one of the two technologies available internationally. Thus, SPML has entered highly specialized field with attractive margins. SPML has reported strong growth in its topline and bottom line for the past few years. Total income grew at a CAGR of 89.8% during the period 2004-2007 and stood at Rs.8.11bn at the end of March 2007. During the same period, contract expenses grew at a CAGR of 90.5% to Rs.6.7bn in FY07. This resulted in PBT and PAT growing at a CAGR of 507.1% and 438.5% to Rs.503.6mn and Rs.436.2mn respectively during the same period. SPML recorded revenue of Rs.7.91bn for the nine months ended December 31, 2007 as compared to Rs.5.32bn during the same period last year representing a growth of 48.5%. Operating margins stood at 9.5% for the first nine months of 2008 and was lower compared to 10.5% recorded by SPML for first nine months of FY2007 due to higher raw material expenses. We initiate our coverage of SPML with a Buy rating and value SPML's share at an intrinsic value of Rs.393.8 based on the Sum of Parts valuation method. The intrinsic value is higher than the current market price of Rs.335.5 (as on April 28, 2008) by 17.38%.

EIEL: As of January 2008, EIEL has an order backlog of Rs.44bn, which is 5.6x FY07 sales. EIEL has very diversified order book. Of its total order backlog of Rs.44bn, 35% was contributed by the infrastructure segment comprising of airports, roads, railways and bridges, 20% is coming from power segment, 20% from housing projects, 10% from industrial projects while balance 15% is coming from hospitals and others. EIEL has plans to roll out 21 projects in 5 states covering more than 600 acres of land to be completed in average time of 2 to 2.5 years. EIEL has reported strong growth in its topline and bottom line for the past few years. Income from operations grew at a CAGR of 91% during the period 2004-2007 and stood at Rs.7.76bn at the end of Mar 31, 2007. During the same period, direct contract expenses grew at a CAGR of 84.3% to Rs.5.86bn in FY07. This resulted in PBT and PAT growing at a CAGR of 197.1% and 201.5.5% to Rs.1.11bn and Rs.791.2mn respectively during the same period. EIEL recorded revenue of Rs.8.39bn for the nine months ended December 31, 2007 as compared to Rs.4.87bn during the same period last year representing growth of 72.2%. Operating margins stood at 23.8% for the first nine months of 2008 and was substantially higher compared to 19.4% recorded by EIEL for first nine month of FY2007 on account of better cost management. We initiate our coverage of EIEL with a Buy rating and value EIEL's share at an intrinsic value of Rs.706.5 based on the Sum of Parts valuation method. The intrinsic value is higher than the current market price of Rs.602.3 (as on April 28,2008) by 17.3%.

GPL: As of December 2007, GPL has an order book of Rs.31.2bn, which is 6.2x of FY2007 sales. Out of total order book, 60% is contributed by cash contracts in roads, 35% by irrigation projects and 5% is contributed by building and industrial works. If we take BOT road projects into account, these projects form 14-15% of the cumulative order book. GPL has reported modest growth in its topline and bottom line for the past few years. Income from operations grew at a CAGR of 17% during the period 2004-2007 and stood at Rs.5.05bn at the end of Mar 31, 2007. During the same period, construction expenses grew at a CAGR of 16.8% to Rs.4.06bn in FY07. This resulted in PBT and PAT growing at a CAGR of 57.6% and 59.4% to Rs.358.3mn and Rs.235.7mn respectively during the same period. GPL recorded revenue of Rs.2.04bn for the quarter ended December 31, 2007 as compared to Rs.1.53bn during the same period last year representing a growth of 33.6%. Operating margins stood at 15.8% for the Q32008 and was substantially higher compared to 14% recorded by GPL for Q32007 on account of better control of construction expenses. We initiate our coverage of GPL with a Buy rating and value GPL's share at an intrinsic value of Rs.563.8 based on the Sum of Parts valuation method. The intrinsic value is higher than the current market price of Rs.493.1 (as on April 28, 2008) by 14.33%.

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