Stars aligned for capex pick-up! CLSA picks 4 stocks

Citing pick-up in orders, solid execution, margin visibility, and strong balance sheet, brokerage firm CLSA raised its target price on 4 E&C sector stocks.

The brokerage raised its target price on Larsen & Toubro (L&T), IRB Infra, J Kumar Infra, and Nagarjuna Construction (NCC).

"India’s E&C and developers outperformed the broad market for the second straight year in 2022, and we think the stars are aligned for a third year of outperformance. This is as India’s E&C (ex-defence plays) and developers have emerged stronger from a Covid- hit FY20-22 in terms of balance sheets and cost structures, and are now seeing a revival in backlogs, stronger execution led by construction, and expanding margins from BHEL," brokerage firm CLSA said.

"The outlook improved with 18%, 15%, and 5% falls in steel, bitumen, and diesel prices, raising the prospect of faster execution with visible margins in 2023. Business visibility (BTB 3x), order pick-up, and margin visibility are rerating catalysts. We adjust earnings and raise our target prices for our E&C coverage," it added.

CLSA further stated that it believes 2023 could be a year to buy users of materials and, hence, India E&C sector stocks could be re-rated and outperform in 2023, as they did in 2022.

Here are CLSA's 4 stock picks:

Larsen & Toubro
The brokerage house has increased its buy target price on Larsen & Toubro. The new target price for the stock is 2,570, showing an upside potential of Rs 19% from the current market price of Rs 2,156.

"We believe a tailwind for its order inflows, double-digit growth in core E&C execution, margin expansion after three years, 233 bps expansion in ROEs, capital reallocation, bonus dividends, and an inexpensive valuation should help L&T outperform the market again in 2023. We view L&T as a good proxy for domestic capex and the company has a credible strategy to improve growth and ROE," it said.

IRB Infra
CLSA raised its buy target price on IRB Infra. The new target price for the stock is 360, implying an upside potential of Rs 20% from the current market price of Rs 299/share.

"We believe the key story for IRB Infrastructure (IRB), which is now a Ferrovial and GIC group company, is that the company should start firing on both cylinders of toll traffic rebound and pickup in backlog from 3QFY23. Traffic on its flagship Mumbai–Pune expressway is growing but the key catalyst, in our view, is an 18% tariff hike – a once-in-3-years event – due from April 1, 2023, while the rest of its roads should secure 8%+ toll hikes for FY24," it said.

J Kumar Infra
CLSA increased its buy target price on J Kumar Infra. The new target price for the stock is Rs 385, indicating an upside potential of Rs 41% from the current market price of Rs 274 per share.

"Our target price is derived by applying an 8x 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 such as J Kumar Infraprojects as it has a strong order book, an asset-light model, and superior and more consistent earnings growth and quality than peers," it said.

Nagarjuna Construction
Brokerage firm CLSA raised its buy target price on Nagarjuna Construction. The new target price for the stock is Rs 118, indicating an upside potential of Rs 27% from the current market price of Rs 93/share.

"We value NCC's engineering and construction business at a 9x PE multiple on one-year forward earnings for the domestic business, which is a 50% discount to the industry leader Larsen & Toubro (mid-cap discount), and approximately a 15% discount to its own trading multiple. The company's other investments – including roads, urban infrastructure, and others – are valued at 0.7-0.8x book value of investments," it said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of the Economic Times)