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Capital Goods
ƒ Order inflows lagging but some signs of pick up evident
Project announcements (projects worth | 9.5 trillion have been
announced in H1FY11), better utilisation levels (robust asset
turnover ratios are showing robust signs of a capex pick-up) and
increasing end product prices will encourage corporates (rising
prices of commodities like copper, coal and crude will call for capex
from metals and process sectors) to invest in capacity creation. This,
in turn, will lead to order flows for the capital goods sector. Though
the IIP and IIP for capital goods have been volatile in the past few
months, we believe robust consumption growth will lead to spillover of order inflows in Q4FY11E and H1FY12E.
ƒ
Better execution to lead to revenue growth but order inflows
muted
Better order inflows in FY10 coupled with a pick-up in execution
rates will ensure that revenue growth for companies in the I-direct
universe will grow by 27% YoY. On a sequential basis, revenues are
expected to grow by 6%. During 9MFY11, order inflows for
companies under our coverage were lower than anticipated barring
Bhel (order inflow growth for H1FY11 at ~20% YoY), thereby
indicating that order inflow growth will spill over to FY12E.
ƒ Margins to decline YoY, QoQ on high raw material cost
On the margins front, we expect it to decline YoY as the cost of high
raw material prices (especially steel and copper) kick in and share of
EPC contracts in overall revenues inches up. Our coverage universe
is expected to report EBITDA margin of 17.4% in Q3FY11E vs. 19.1%
in Q3FY10. The same will percolate to the PAT margins, which we
expect to be around 11.9% for Q3FY11. Overall, we expect our
coverage universe stocks to post 16% YoY PAT growth.
ƒ BGR Energy, Thermax to post highest revenue and PAT growth
Given robust order backlog and high book to bill ratio, we expect
BGR Energy and Thermax to post revenue growth of 81% YoY and
60% YoY, respectively. EBITDA margins for the company will decline
YoY and QoQ for both companies as the share of low margin EPC
revenue rises. We expect PAT growth for BGR Energy and Thermax
to be 60% YoY and 73% YoY respectively.
Bhel H1FY11 registered order inflow growth to the tune of ~20% YoY. We expect that
company, in Q3FY11, to clock robust revenue growth of 25% YoY, on the back of the
| 154000 crore order backlog. The EBITDA is expected to remain stable at 19.2%.
We have built in PAT growth of 12% YoY
BGR Energy With timely execution of two EPC orders in place, we expect BGR to report an 81%
YoY rise in revenues for Q3FY11 to | 1147.7 crore but order inflows were muted.
EBITDA margins are expected to decline YoY to 11.1% as the impact of high raw
material cost kicks in. We expect PAT to grow 60% YoY
Thermax We expect the company to bill significant portion of revenues from the utilities
segment (large ticket order segment). We expect Thermax' topline to grow by 60%
YoY, driven mainly by 70% YoY and 42% YoY growth in the energy and environment
segment, respectively. PAT is expected to grow by 73.4% YoY
Hindustan Dorr With a reasonable book to bill ratio and muted order inflow during Q3FY11, we
expect the company to report revenue growth of 34% YoY. With increased share of
EPC revenues and higher cost of raw materials, we expect EBITDA margins to
decline YoY to 9.5%. We have built in PAT growth of 9.4% YoY
Sterlite Technologies
We expect the company to record 16.8% QoQ rise. We expect volume growth in the
telecom and power segment to be tepid. We expect EBITDA margins to decline at
16.5% mainly due to lower margins in the power segment. We expect PAT growth
of 4% QoQ
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