Capital Goods -Balancing act :: Anand Rathi

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Capital Goods
Balancing act
Infrastructure, despite tardy growth and skewed spending, is
key for the capital goods sector even as industrial capex is
bottoming out. Infra spend of US$1trn expected in XII FYP
would drive demand. Industrial capex might slow down as
lower capacity utilization persists and credit growth falters.
Profit growth due to recent operating leverage, despite sub-par
revenue growth, is likely to be subdued.

 Infra holds the key, owing to inadequate infrastructure, rising
private investment and demand being insulated from global
slowdown. Likely 50% of the XI FYP spend in FY11-12 and
US$1trn spend in XII FYP offer a huge opportunity.
 We are positive on T&D-EPC owing to: i) focus shift on
T&D capex – XI FYP generation equipment already awarded;
+50% awarded for XII FYP; ii) global replacement & system
strengthening demand; iii) shift to non power-related jobs.
 Industrial capex to bottom out. Sliding growth and share of
manufacturing projects, slowed non-food credit growth and low
capacity utilization imply an industrial capex lull. Domestic
consumption and expected capacity addition, ahead of demand
curve, would lead to renewed capex cycle.
 TTM sector-underperformance. Revenue/profit have grown
13%/19% from 1QFY10. Rising commodity prices and interest
rate would cut profitability. Though order book strengthened,
execution lagged. The current operating margin levels in T&D
EPC would be unsustainable for new entrants.