RBS preview of Capital Goods: 2H outlook will be key

Capital Goods: 2H outlook will be key
Order inflow, revenue and margin remain the key items to watch in management's
outlook. The September-end quarter saw slow tendering. We see 15% yoy PAT
growth in our capital goods universe and 10% in our utilities universe. We like
BHEL, BEL and Crompton in capital goods and NTPC in utilities.


September quarter saw staid tendering; management outlook remains key
Project activity declined in the September-end quarter, with net additions to the number of
outstanding projects down to 1,540 from 1,948 in the same period last year. We believe
order inflows remained muted, given delays in order tendering, particularly at government
players such as NTPC and Power Grid. We estimate 15% yoy PAT growth for the capital
goods companies and 10% for the utilities in our coverage universe. As in past quarters,
management comments regarding the outlook for order inflow, order book, revenue and
margin will be key, as these would set the tone for 2HFY11 and full fiscal year (to March).
Policy support remains in favour of local players
The six months to end-September saw continuation of policies that support local
manufacturing. Power Grid floated a draft of a note that would make it mandatory for
suppliers to have domestic manufacturing facilities within three years. This follows a Central
Electricity Authority directive in the last financial year to state and central utilities to place
orders with domestic vendors.
Orders should see traction in 2HFY11F
We expect better traction in equipment orders in 2H, particularly by government players. By
December 2010, we would expect NTPC to float a tender for a Rs180bn contract for the bulk
supply of 800MW projects (following the bulk tender for 11x 660MW that is currently under
consideration, which should be a positive for BHEL. Similarly, order flow from Power Grid
should pick up once its follow-on equity offer closes in November 2010, benefiting
transmission equipment suppliers, such as Crompton.
We still like BHEL, BEL and Crompton in the capital goods sector; NTPC in utilities
We maintain our preference for BHEL, BEL and Crompton Greaves in the capital goods
space. We are positive on L&T in the medium term, but prefer BHEL in the near term. We
maintain our Sell ratings on the MNC T&D companies we follow. In utilities, we like NTPC.