Tuesday, October 18, 2011

>Capital Goods Q2FY12 Preview

During Q2FY12; CG index underperformed sensex by 11.8%. IIP numbers also did not help as capital goods de grew by 15.2% for July. Obstacles in the form of land acquisitions, environment clearances and rising interest rate still linger on and will continue for near term. We expect flat top line performance for our coverage universe and de growth in EBITDA and PAT due to rising input and interest cost respectively.

Flat growth in top line for Q2FY12
We expect revenue of our coverage universe to witness flat growth as a result of declining or stagnant order book for companies like BGR, Voltas and Crompton Greaves. Crompton Greaves’ overseas business will benefit from Euro appreciation against Rupee by 8% y-o-y. Elecon Engineering and Jyoti Structures shall post decent growth due to growing order book.
EBITDA and PAT to be once again hit by higher material cost and interest charges

EBITDA for coverage universe is likely to decline by 10.3% as a result of mix of increased cost and competition. Therefore, we expect margin for our coverage universe to decline by 120bps. Companies with lower base or escalation clause shall be able to at least maintain their margins. PAT is expected to de grew by 20.6% y-o-y. The de growth is likely to be a result of increased interest cost particularly for BGR Energy and Jyoti Structures.

Another dry spell for order inflow
Announced order inflows for the sector indicate that Q2FY12 could well be another dry spell for orders. Amongst large caps, L&T has just managed an order win of ` 91bln while BHEL did not announce any significant order win except a single BTG package order of 2x660MW from Singareni Collieries for ` 32bln each. Although opening of NTPC super critical bulk tenders (9x800MW) did provide a ray of hope in otherwise a lackluster quarter. Moreover, PGCIL announced orders worth ` 34.5bln (83.3% y-o-y) which may boost order book of T&D companies.

We understand poor performance of capital goods sector is built in stock prices to a certain extent; thereby arresting major downside for stocks with good revenue visibility and margin stability. Hence, we like Elecon Engineering and AIA Engineering; Elecon for its strong order book and diversified business and AIA Engineering for its successful headway into international markets in mining and cement that shall reap rich dividends in the long term.

To read the full report: CAPITAL GOODS