India: Small plays on the big capex idea

- Infra capex — next ramp-up point approaching "We believe the Indian investment cycle is likely to witness a significant structural inflection in the next few years, led by a significant improvement in the cashflows of private infrastructure operators. Despite some short-term delays, the story on both infra and corporate capex is expected to be strong in India. We think that 2012-13 will see a significant inflection in activity levels in the Indian infrastructure sector."
- Industrial capex turning around "On the corporate capex side, while the picture is becoming positive, companies with dependence on large and late-cycle industrial capex have not recovered fully.
Overall, strong demand, high capacity utilisation and a relatively stable macro environment present a positive environment for a revival in corporate capex."
- Looking for mid-cap beneficiaries "We have looked at mid-cap (US$200mn-US$1.5bn) companies which are fairly leveraged to and are likely to benefit significantly from a pick-up in capex activities. These are companies with strong competitive positions in relatively consolidated industries with large capacity expansions (without equity dilution)."
- Our top mid-cap picks "Voltas (18.4% earnings CAGR over FY10-12F, 40.6 % ROE, 15x FY12F P/E) is a well established, liquid stock with a world-class engineering project portfolio and a successful refrigeration business. Triveni Engineering’s (52% CAGR over FY10-12F, 20% ROE FY09, 14.6x FY12F P/E) tie-up with GE brings its market-leading turbine business into sharper focus and a spin-off could unlock value. Sterlite Technologies’ (14% CAGR over FY10-12F, 32% ROE, 10.7x FY12F P/E) strengths in optical fibre and power conductors fit right into telecom expansion and the significant growth in power capacity. Maharashtra Seamless (13% CAGR over FY10-12F, 16% ROE, 7.5x FY12F P/E) is the leading supplier of seamless pipes to the oil and power industries. We also present Nomura Nuggets (non-rated reviews) on GEI Industrial Systems, Elgi Equipments and Techno-Electricals."

Nomura India Small Mid Caps 1 Sep2010
Nomura India Small Mid Caps 2 Sep2010

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