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Capital Goods
• We expect our coverage universe to report sluggish order intake growth of mid to high teens. While execution
delays have been a key impediment , we anticipate an improvement on this account during Q3 leading to 21%
sales growth. The operating and net margins are expected to contract as the key raw materials for manufacturing
sector ‐ Steel, Copper and Aluminum are up by 9%, 30% and 16% respectively on YoY basis. Hence our growth
estimates for operating profit and net profit at 14% and 12% p g p p respectively lag the topline growth
• While we have seen sustained uptrend in industrial production (YTD growth of 10.3% for IIP) we are also
witnessing near term delays in order finalization by private and public sector entities. The recent cautious
approach adopted by banks for funding large infrastructure / industrial projects has further compounded the
situation
• In the medium to long term, we remain positive on the sector. Capacity expansion and modernization plans
announced by manufacturing companies across sectors suggest robust demand for capital goods companies in
the coming quarters. We also expect material handling companies to benefit significantly as orders worth
Rs.720bn (USD 18 bn) for 45,000 MW balance of plant equipments for 12th Five Year Plan are likely to be placed in the next six quarters
Capital Goods – Top Picks
• With current order book of 45,000MW and Rs.1.5 tn(USD 33 bn, 4.7xFY10 sales) and capacity expansion to
15,000MW, we estimate BHEL to report sales and profit CAGR of 25% and 30% over FY10‐12E
• Valuations at 19.7xFY11E and 15.6x FY12E earnings and EV/EBITDA of 13.4xFY11E and 10.2xFY12E
• High revenue visibility, healthy earnings growth and debt free cash rich balance sheet ‐‐ all key ingredients
for valuations favor BHEL. We recommend Accumulate on the stock
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