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Key themes for 2011
Business/Economic:
The last year of the 11th Plan may see a rush by Central
and State Govt. to meet capex and ordering targets. The
previous year was marred by order deferrals especially in
roads, T&D, railways and airports – a recovery in
infrastructure spending beyond power generation is
expected in CY11. Positive regulatory developments and
prospect of oil price inflation are expected to boost
renewable and O&G capex. We expect the revival in
industrial spending to continue in CY11, led by the
positive macro environment. Award of NTPC orders for
11x660MW boilers, and 9x800MW BTG in CY11 would
define the future competitive dynamics in the power
equipment space.
Political:
Given the Indian government's impetus on infrastructure
development, we continue to see favorable policy
implementation and budgetary support. Planning
Commission is expected to unveil the 12th Plan for
Infrastructure spending with ambitious targets pegged at
~US$1trillion. The domestic power equipment industry
continues to lobby for imposition of duties on Chinese
equipment imports without success. Execution could be
adversely impacted if stand-offs on land acquisition,
forest and environmental clearances continue.
How the business is expected to evolve through the
year
In 2011, we expect the domestic power sector revenues
to grow at ~20% and margins for equipment
manufacturers to remain stable with a downward bias as
the hike in raw material prices kicks in. The overall
negative impact due to revenue booking on supercritical
power equipment orders will be marginal in CY11. For
industrials, the other key sector to which our stocks have
exposure, we expect a 20% YoY growth in CY11, a
continuation of recovery seen in CY10- especially in
short cycle projects. Competitive pressures on margins
may continue but a demand push is expected to cushion
the impact in CY11.
Sector view
The growth in domestic capital goods sector appears
more secure and robust now, in light of benign macro
environment (Sep-q GDP growth of 8.9%). Also with
utilities and PSUs raising equity funds in CY10,
relaxation on ECB financing, we expect more projects to
attain financial closure and hence ordering to be robust.
Stock recommendation
In our opinion concerns on market share loss, and risk to
margins for BHEL are overdone. We continue to like
BHEL for its order book visibility, high exposure to the
power equipment sector and cheaper valuation. L&T,
expensive in comparison may under-perform relative to
BHEL over the near term, as deferral of ordering in key
infrastructure sectors is a risk to growth beyond FY12,
but from a 12-to-15-month perspective we prefer L&T
over BHEL. We also like CG owing to its healthy
operational performance vs. peers, decent M&A trackrecord,
and pick-up in T&D ordering in CY11. ABB
continues to be a stock to avoid, in our view, on account
of rich valuations combined with weak fundamentals.
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