Capital Goods-Growing order book and steady execution gives comfort, Prabhudas Lilladher,

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 Execution on track: The Capital Goods sector reported a sales growth of 21%
YoY to Rs278bn. The top‐line performance is strong, given that we had
monsoons for ~80 days in the quarter. Sales growth has been on a healthy
uptrend. The execution has improved clearly at the ground levels; this is on the
back of various issues which the companies in this sector are facing at the
ground levels like land acquisition and other infrastructure bottlenecks.


 Margin improvement continues: EBITDA margins for the sector increased by
8bps YoY to 12.6%. Margins continued to improve YoY since the last six quarters
despite a steep increase in price across commodities. The impact of raw
material price increase was cushioned to a great extent by the strong execution.
However, high commodity price remains a risk to margins over the next few
quarters.
 Strong PAT growth: The sector reported a PAT growth of 29% YoY to Rs25bn. A
steep rise in the Interest cost (up 25% YoY) was negated by a 31% YoY rise in
Other income. The Interest cost as a % of sales has been rising since the last
three quarters on account of increased borrowing costs. We expect the interest
expense to rise further over the next two quarters due to increased borrowing
costs.
 Improving Book‐2‐Bill providing visibility: Order book for the sector stood at
Rs3,235bn, up 29% YoY which is 2.9x (TTM) sales. The order inflow for the sector
was up 19.3%. The book‐to‐bill ratio for the sector has been improving
consistently together with steady execution which we think is a very
encouraging sign. Power continued to dominate the order inflow for most
companies in the sector. However, the management commentary on industrial
capex across companies sounded positive and we expect these orders to pick up
in the system. According to the CMIE data, new projects worth Rs5.8trn were
announced in this June quarter. This is the second largest new project
announcement seen in a single quarter. Also, since the Power grid orders are
more skewed towards the second half, order awarding is more likely to pick up
momentum during that period.
 Top picks: BHEL, Thermax, BGR Energy, Voltas, KEC International.