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Industrials
India
Global capex momentum just recovering lost base; Indian is much more resilient.
We compare the momentum demonstrated by global capital goods companies vs some
pessimism in Indian capital good sector. Global capex activity grew 21% in 4QCY10 but
over medium term view it is still below level achieved in 4QCY07. Indian capex while
having cyclical pessimism right now has grown at least 40% during same period. Global
capex is seemingly led by emerging markets itself. Growth, though recovering old base,
is good for Crompton and Cummins’ exposure to global capex environment.
Global capex numbers appear strong but primarily led by base effect; still well below CY07 levels
We compare the momentum demonstrated by global capital goods companies versus some
pessimism in Indian capital good sector. For measuring global capex we have added the revenues
of Caterpillar, Cummins, Komatsu and Honeywell and the order inflows for Siemens. Activity for
these companies grew 13% in CY2010 and 21% in 4QCY10. However, we note that large part of
this led by base effect as this growth is on back of a 23% decline in CY2009. 4QCY10 activity has
still de-grown at a 3-year CAGR and is still well below activity levels in 4QCY07 in absolute terms.
Emerging markets have driven global capex numbers; US/Europe have declined over three years
We highlight that in the product business (Cummins and Caterpillar), share of Asia and Latin
America has increased consistently from 25% in CY2007 to 39% in CY2010. Actually Europe and
US combined have declined 20% on an absolute basis over last three years. Latin America and
Asia Pacific have grown by 50% during the same period. However, we highlight that similar
pattern is not visible in the ABB/Siemens order inflow mix over the same period and the mix has
remained virtually unchanged in these two cases.
Guidance of global companies is positive; though recovering old base only; yoy growth is strong
Global majors like Cummins, Siemens, Caterpillar and Honeywell have guided for strong growth in
CY2011E. While in some cases such as Caterpillar and Honeywell guidance is still below historical
numbers achieved in CY2008 and only a moderate growth in others over CY2008 achievement
such as Siemens and Cummins. However, positive guidance indicates that recovery is taking hold
and even though led by base effect, yoy growth is seemingly achievable.
Global momentum positive for Cummins India and Crompton
We believe that recovery in global capex and reasonably positive guidance even though recovering
old base is positive for companies with substantial overseas exposure such as Crompton and
Cummins from a yoy growth perspective. Crompton at its peak booked orders worth Rs15 bn
each quarter which stands at Rs10 bn now (having grown from low of Rs7 bn). Cummins used to
have exports run rate of Rs2,700 mn engine sales per quarter which now stands at Rs2,760 mn in
2QFY11 (recovering from bottom of Rs723 mn).
Current pessimism on domestic capex env. cyclical; grown 40% vs global de-growth in three years
While there is pessimism in the domestic capex environment currently, we believe that it is mostly
cyclical in nature. Indian capex environment has definitely been more resilient during the last three
years. While global capex metric has been stagnant (sharp decline in CY2009 and some recovery
now), similar metric, i.e. sum of order inflow for five India capex companies (L&T, BHEL, Siemens,
Thermax and Crompton) is up 40% during the last three years.
Base effect helping global majors report strong CY10 results
We take sample set of 5 companies for judging global growth momentum: (1) Caterpillar (2)
Cummins (3) Honeywell (4) Siemens and (5) Komatsu. For the sample the total activity
(generally revenues but orders for Siemens) witnessed a steep decline in 4QCY08 and for the
whole of CY09. These companies have shown strong growth in activity of 13% in CY10
Although we do believe that a strong recovery has happened globally in CY10 we highlight
the role of base effect in the reported growth. Total activity in CY10 has grown 13% yoy
but is still significantly below the levels in CY07 and CY08. CY10 sample activity at $222 bn
implied a 3-year CAGR de-growth of 2.6%.
EM business driving product growth though share stagnant in order mix
Combining Cummins and Caterpillar revenues for product business, we highlight emerging
market business has significantly increased as percentage of the total revenues. The EM
share has increased from 25% in CY07 to 39% in CY10. The consistency in increase
highlights that business from EM increased more than mature economies during good times
CY06-08) and was effected during and post the crisis period (CY08-CY10) for the product
business.
Comparing on an absolute scale, EM revenues have grown 14% CAGR over CY07-10 while
revenues from developed economies has contracted at CAGR of 7.6% over the same period.
In contrast, a similar trend of increasing EM share is not seen in the order flow mix of ABB
and Siemens. The mix has remained almost stagnant over the past three years. Asia/Pacific’s
share of orders has been in the range of 19-24% and does not exhibit any trend.
Global majors guiding for strong CY11 revenues; recovering old base
Global majors like Siemens and Cummins have guided for revenues above peak 2008 levels
for CY11. Cummins has guided for CY11E consolidated revenues of $16 bn (growth of
21%), overshooting its CY08 high of $ 15 bn. Siemens has also guided for 25% revenue
growth in CY11. Even Caterpillar’s CY11E revenues at $50 bn would also be close of its
CY08 peak of $51.3 bn. Such positive guidance indicates that recovery is taking hold and
even though led by base effect, yoy growth is seemingly achievable.
Global momentum positive for Cummins India and Crompton
We believe that domestic concerns of inflation and lack of liquidity is mainly responsible for
the recent shortfall in order inflows. In such macro environment, we believe that companies
with diversified exposure stand best to face domestic worries and capture global growth
opportunities. We highlight that Cummins India has an export share of 25-30% for export
business. Cummins used to have exports run rate of Rs2,700 mn engine sales per quarter
which now stands at Rs1,900 mn (recovering from bottom of Rs723 mn).
The global capex momentum is also positive for Crompton which gets half of its revenues
from international operations spread across Asia, America and Europe. Crompton at its peak
booked orders worth Rs15 each quarter which stands at Rs10 bn now (having grown from
low of Rs7 bn).
Cyclical pessimism in domestic capex environment; domestic outperforms global
While there is pessimism in the domestic capex environment currently, we believe that it is
mostly cyclical in nature. Indian capex environment has definitely been more resilient during
the last three years. While global capex metric has been stagnant (sharp decline in CY2009
and some recovery now), similar metric i.e sum of order inflow for five India capex
companies (L&T, BHEL, Siemens, Thermax and Crompton) is up 40% during the last three
years. For 9MFY11, these key domestic players have reported order flows of Rs1027 bn vs.
Rs740 bn in 9MFY08 (up 40%). In contrast, activity of key global companies (Caterpillar,
Siemens, Honeywell, Komatsu and Cummins) has declined 8% from CY07 to CY10.
We highlight that domestic order flow has declined about 15% yoy in 3QFY11. We believe
the de-growth is led by inherently domestic concerns of (1) increasing inflation affecting
disposable income and (2) lack of liquidity impacting financial closures.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials
India
Global capex momentum just recovering lost base; Indian is much more resilient.
We compare the momentum demonstrated by global capital goods companies vs some
pessimism in Indian capital good sector. Global capex activity grew 21% in 4QCY10 but
over medium term view it is still below level achieved in 4QCY07. Indian capex while
having cyclical pessimism right now has grown at least 40% during same period. Global
capex is seemingly led by emerging markets itself. Growth, though recovering old base,
is good for Crompton and Cummins’ exposure to global capex environment.
Global capex numbers appear strong but primarily led by base effect; still well below CY07 levels
We compare the momentum demonstrated by global capital goods companies versus some
pessimism in Indian capital good sector. For measuring global capex we have added the revenues
of Caterpillar, Cummins, Komatsu and Honeywell and the order inflows for Siemens. Activity for
these companies grew 13% in CY2010 and 21% in 4QCY10. However, we note that large part of
this led by base effect as this growth is on back of a 23% decline in CY2009. 4QCY10 activity has
still de-grown at a 3-year CAGR and is still well below activity levels in 4QCY07 in absolute terms.
Emerging markets have driven global capex numbers; US/Europe have declined over three years
We highlight that in the product business (Cummins and Caterpillar), share of Asia and Latin
America has increased consistently from 25% in CY2007 to 39% in CY2010. Actually Europe and
US combined have declined 20% on an absolute basis over last three years. Latin America and
Asia Pacific have grown by 50% during the same period. However, we highlight that similar
pattern is not visible in the ABB/Siemens order inflow mix over the same period and the mix has
remained virtually unchanged in these two cases.
Guidance of global companies is positive; though recovering old base only; yoy growth is strong
Global majors like Cummins, Siemens, Caterpillar and Honeywell have guided for strong growth in
CY2011E. While in some cases such as Caterpillar and Honeywell guidance is still below historical
numbers achieved in CY2008 and only a moderate growth in others over CY2008 achievement
such as Siemens and Cummins. However, positive guidance indicates that recovery is taking hold
and even though led by base effect, yoy growth is seemingly achievable.
Global momentum positive for Cummins India and Crompton
We believe that recovery in global capex and reasonably positive guidance even though recovering
old base is positive for companies with substantial overseas exposure such as Crompton and
Cummins from a yoy growth perspective. Crompton at its peak booked orders worth Rs15 bn
each quarter which stands at Rs10 bn now (having grown from low of Rs7 bn). Cummins used to
have exports run rate of Rs2,700 mn engine sales per quarter which now stands at Rs2,760 mn in
2QFY11 (recovering from bottom of Rs723 mn).
Current pessimism on domestic capex env. cyclical; grown 40% vs global de-growth in three years
While there is pessimism in the domestic capex environment currently, we believe that it is mostly
cyclical in nature. Indian capex environment has definitely been more resilient during the last three
years. While global capex metric has been stagnant (sharp decline in CY2009 and some recovery
now), similar metric, i.e. sum of order inflow for five India capex companies (L&T, BHEL, Siemens,
Thermax and Crompton) is up 40% during the last three years.
Base effect helping global majors report strong CY10 results
We take sample set of 5 companies for judging global growth momentum: (1) Caterpillar (2)
Cummins (3) Honeywell (4) Siemens and (5) Komatsu. For the sample the total activity
(generally revenues but orders for Siemens) witnessed a steep decline in 4QCY08 and for the
whole of CY09. These companies have shown strong growth in activity of 13% in CY10
Although we do believe that a strong recovery has happened globally in CY10 we highlight
the role of base effect in the reported growth. Total activity in CY10 has grown 13% yoy
but is still significantly below the levels in CY07 and CY08. CY10 sample activity at $222 bn
implied a 3-year CAGR de-growth of 2.6%.
EM business driving product growth though share stagnant in order mix
Combining Cummins and Caterpillar revenues for product business, we highlight emerging
market business has significantly increased as percentage of the total revenues. The EM
share has increased from 25% in CY07 to 39% in CY10. The consistency in increase
highlights that business from EM increased more than mature economies during good times
CY06-08) and was effected during and post the crisis period (CY08-CY10) for the product
business.
Comparing on an absolute scale, EM revenues have grown 14% CAGR over CY07-10 while
revenues from developed economies has contracted at CAGR of 7.6% over the same period.
In contrast, a similar trend of increasing EM share is not seen in the order flow mix of ABB
and Siemens. The mix has remained almost stagnant over the past three years. Asia/Pacific’s
share of orders has been in the range of 19-24% and does not exhibit any trend.
Global majors guiding for strong CY11 revenues; recovering old base
Global majors like Siemens and Cummins have guided for revenues above peak 2008 levels
for CY11. Cummins has guided for CY11E consolidated revenues of $16 bn (growth of
21%), overshooting its CY08 high of $ 15 bn. Siemens has also guided for 25% revenue
growth in CY11. Even Caterpillar’s CY11E revenues at $50 bn would also be close of its
CY08 peak of $51.3 bn. Such positive guidance indicates that recovery is taking hold and
even though led by base effect, yoy growth is seemingly achievable.
Global momentum positive for Cummins India and Crompton
We believe that domestic concerns of inflation and lack of liquidity is mainly responsible for
the recent shortfall in order inflows. In such macro environment, we believe that companies
with diversified exposure stand best to face domestic worries and capture global growth
opportunities. We highlight that Cummins India has an export share of 25-30% for export
business. Cummins used to have exports run rate of Rs2,700 mn engine sales per quarter
which now stands at Rs1,900 mn (recovering from bottom of Rs723 mn).
The global capex momentum is also positive for Crompton which gets half of its revenues
from international operations spread across Asia, America and Europe. Crompton at its peak
booked orders worth Rs15 each quarter which stands at Rs10 bn now (having grown from
low of Rs7 bn).
Cyclical pessimism in domestic capex environment; domestic outperforms global
While there is pessimism in the domestic capex environment currently, we believe that it is
mostly cyclical in nature. Indian capex environment has definitely been more resilient during
the last three years. While global capex metric has been stagnant (sharp decline in CY2009
and some recovery now), similar metric i.e sum of order inflow for five India capex
companies (L&T, BHEL, Siemens, Thermax and Crompton) is up 40% during the last three
years. For 9MFY11, these key domestic players have reported order flows of Rs1027 bn vs.
Rs740 bn in 9MFY08 (up 40%). In contrast, activity of key global companies (Caterpillar,
Siemens, Honeywell, Komatsu and Cummins) has declined 8% from CY07 to CY10.
We highlight that domestic order flow has declined about 15% yoy in 3QFY11. We believe
the de-growth is led by inherently domestic concerns of (1) increasing inflation affecting
disposable income and (2) lack of liquidity impacting financial closures.
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