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Industrials
Potential Result Outperformers: NA
Potential Result Underperformers: ABB, JPA, IVRC
E&C
We expect 17%YoY growth in rec. PAT of Indian Engineering & Construction
(E&C) majors (ex-Suzlon) led by improved execution (BHEL, L&T, IVRC)
despite a) margin pressure on high base – IVRC; b) higher fixed costs (interest
and depreciation) – BHEL, IVRC, L&T, NJCC and c) higher tax – ABB, BHEL,
L&T. We expect Suzlon to materially narrow rec. loss of Rs520mn (vs Rs2.3bn
of loss in 3Q10) on rebound in domestic wind markets.
We think that led by investments done in FY11, the PAT growth will go into a
new orbit from 1HFY12 once operating leverage kicks in as capacity gets
better utilized. Hence, we think any fall in E&C stocks could represent an
opportunity to buy into the extended-cycle for Indian E&C stocks.
We expect double digit growth in order backlog for most E&C companies.
The key issues to watch out for in the E&C sector is likely improved
execution after an extended monsoon in 2Q.
We expect the Indian E&C Sector, represented by BHEL, L&T, Suzlon, ABB,
IVRCL and NJCC to report (ex - Suzlon) sales growth of 20%YoY, EBITDA
growth of 21%YoY and Recurring PAT growth of 17%YoY.
L&T: Assuming the 3Q10 ratio of actual order inflows vs orders announced we
expect L&T’s order inflows to fall 7% at ~Rs165bn (Rs122bn announced) led
by continued postponement of capex. The inflows during the 3Q11 were led by
big ticket project wins in Building & Factory, Power, Metallurgical, Electrical,
roads and railways domains and customers such as Ministry of Transport,
Oman Rs22bn, DB Power Rs14bn, Department of Transport, Abu Dhabi
Rs7bn, Tamil Nadu Water Supply & Drainage Board Rs5 and Tata Steel
Rs5bn. We expect L&T to post one of the better results in our universe, with
rebound in sales growth (23%YoY) on a very low base (-6%) & PAT
(17%YoY). However, the reported PAT is expected to be down by 3% due to
Rs1.5bn of gain on sale of stake in Satyam and reversal of provision for loss on
investment in 3QFY10. Markets will also likely be more focused on any change
in the guidance for new orders in FY11E on likely order for Hyd. Metro.
BHEL remains our preferred pick on visible and sustainable growth led by a
well priced order backlog of Rs1.54tn/US$34bn in 2QFY11. However, inflows
are likely weak as orders worth Rs22bn to 4Q. It announced new order intake
of Rs76bn in 3QFY11 – won its largest order in life from Indiabulls Power of
Rs57.6bn and an order from APGENCO Rs14.5bn. We see BHEL getting set
to significantly surprise a market worried on the new order inflows with
pipeline of over Rs240bn worth of orders in 4Q. Strong sales growth despite
a high base, 206bps fall in the labor costs as % to sales & rise in material
costs would be the key number to look for in 3Q11.
Meanwhile, ABB’s 4QCY10 rec. earnings are expected to be Rs1.5bn
(+19%YoY) on sales growth of 14%YoY. The deteriorating visibility drives our
Underperform rating.
Suzlon: In 3QFY11 Suzlon could narrow consolidated rec. loss of Rs520mn
on doubling of domestic sales. Mix change in favor of India should drive
blended margins up 113bps.
IVRC 3Q is likely mark a ‘U’ turn in its execution after a weak 2Q but it may
still be weaker vs market expectations with estimated PAT growth of 3% led
by extended monsoon in South, land acquisition challenges at IVR Asset
roads (sales +18%YoY), high staff, depreciation and interest costs. IVR
Assets has secured equity funding in Oct’10 so execution should pick up
materially in 4Q. EBITDA growth should indeed bounce back to 16%. It has
announced Rs25bn, +21%YoY, of orders led by Rs18bn order in the water
segment from Saudi Arabia.
Expect NJCC’s sales to grow at 15%YoY and EBITDA to grow at 20%YoY in
3QFY11. This would lead to an estimated 17%YoY growth in rec. PAT.
Infra Developer
JPA: JPA likely to have a weak 3QFY11 led by higher fixed costs of cement
expansion which could not be supported by volume growth (+15%QoQ) and
lower treasury income. While E&C top line growth to +15%YoY on higher
base led by strong execution at karcham HEP and start of realty build-out for
JP Infra. We expect 20%YoY growth in revenue, 19%YoY growth in EBITDA
while Rec. PAT would be flat at Rs2.4bn. However, we estimate reported
PAT will be 128%YoY due to Rs2.1bn extraordinary employee cost and
Rs1.3bn extraordinary E&C sales in 3QFY10.
Adani Enterprises is expected to report a Rs7.2bn of Cons. Rec. PAT,
+133%YoY, on consolidation of MPSEZ in FY11 and start of 1320MW of
Power plant at Mundra. However, coal trading volume shall be muted at
9%YoY.
Mundra Port and SEZ should also see a good quarter with port traffic
+33%YoY led by coal, fertilizer and container. Recurring PAT +46%YoY.
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