Saturday, November 14, 2009


Key takeaways from Q2 FY10 results: Sales growth for our coverage universe was below estimates because of slow order execution, highlighting the impact of improving macro growth yet to percolate into the order book. EBITDA margins expanded 50-110bps y-o-y (except NCC) on better revenue mix and lower commodity prices.

Estimate changes:
On the back of trends visible in H1 FY10, we have revised sales for our coverage down by 3-7% and EBITDA margins up. This has resulted in our earnings estimates changing by -1% to 7% in FY10 and FY11 (IVRCL cut by 6% in FY10 and 12.5% in FY11).

Q2 results were a mixed bag, as high margins offset lower sales growth impact.
We continue to expect H2 FY10 recovery on improving macro growth.
NCC OW(V) and Simplex OW(V) are our top sector picks.

Outlook: We expect macro economic recovery in H2 FY10 to increase order inflows and drive earnings acceleration. While interest cost should also inch up, it should be more than offset by higher volumes.

We believe near-term valuation for the sector is rich and investors with a medium- to long-term horizon should “cherry pick” stocks with better revenue visibility and earnings growth. NCC and Simplex emerge as leaders on both counts and hence are our top picks. We expect IVRCL to underperform its peers on expectations of 12-15% lower than consensus earnings estimates over FY10-11.

Expecting H2 FY10 recovery

We look forward to recovery in sector top-line growth in H2 FY10 on the back of improving macro growth
Adjusting earnings for Q2 FY10 performance of weak sales growth, which was offset by operating margin expansion
Despite the recent correction, valuations remain rich in the near term. NCC OW(V) and Simplex OW(V) are our top picks

To read the full report: INDUSTRIALS CONSTRUCTION