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The capital goods (CG) index was the major loser during
4QFY2011, declining 14.1% as compared to the 5.2% fall in
the Sensex. Lower-than-expected IIP growth coupled with the
continuing decline in CG production over the past few months
adversely affected CG stocks during the quarter. In addition to
declining IIP numbers, the fall in new order bookings coupled
with hardening interest rates, delays in land acquisition and
environmental clearances also negatively affected the CG sector.
Valuations corrected significantly during the first two months of
the quarter, before marginally recovering in March 2011.
Despite underperforming the broad-based Sensex for a major
portion of the quarter, valuations of front-line stocks in the
CG index continued to trade at a premium to the Sensex.
Major losers during the quarter were BGR Energy and Jyoti
Structures, which declined by 34.3% and 39.1%, respectively,
in absolute terms. Though BGR Energy reported robust results
for 3QFY2011, the stock was affected in 4QFY2011 due to
poor order intake and low earnings visibility going forward.
During the quarter, Jyoti Structures successfully raised `123cr
through 7% NCD, which would enable the company to
substantially reduce its interest cost going forward. In contrast,
ABB gained 0.6%, despite reporting poor results for 4QCY2010
and reduced order intake for CY2010.
Macros signal slowdown
After reporting strong double-digit growth during the first half
of FY2011, IIP numbers for November 2010-January 2011
have consistently drifted downwards and have settled at
sub-4%, less than 1/4th their pace a year ago. The deceleration
has come on the back of contraction in the manufacturing sector
as a whole. The manufacturing sector, which contributes ~80%
to the IIP, reported ~ 3% growth, while CG production reported
negative growth during the same period. CG production for
December 2010 and January 2011 dipped by 9.3% and 18.6%,
respectively. The overall decline in industrial growth is likely to
reduce the GDP growth rate for 2HFY2011 to less than 8.9%
reported in 1HFY2011.
Deterioration in the macro environment, viz. hardening interest
rates causing the cost of capital to remain high, delays in
environment approvals, coal linkages and land acquisition, has
deferred order finalisation. Going forward, we expect various
CG majors to miss the order inflow guidance for FY2011. In
addition, rising commodity prices over the past few quarters
are likely to affect profit margins of CG companies.
The Indian CG sector continues to be negatively impacted by
increasing competition, especially from China. We believe the
administered currency regime, cheaper finance and the
favourable duty structure under which Chinese companies
operate have enabled them to place their products in Indian
markets at lower prices. Domestic power equipment
manufacturers such as BHEL and L&T have been losing bulk of
the orders to their Chinese counterparts. During 3QFY2011,
various private sector power developers had placed orders worth
over US $12bn to various Chinese power equipment companies.
These orders were placed when the domestic power equipment
industry was in the midst of expanding capacities to meet the
growing demand. Besides, the power transmission and
distribution (T&D) segment has also seen serious competition
from Chinese and Korean majors.
Key developments
ABB
ABB Group, Zurich, has been selected by PGCIL to deliver an
ultrahigh voltage transmission system, worth about US $900mn.
The company has been chosen to execute the Northeast Agra
transmission project along with BHEL, which will deliver the
remainder of the project (worth more than US $1.1bn) over the
next 48 months. The parent company is expected to pass on
~15% of the order value to its Indian subsidiary. ABB Ltd. has
approved the proposal to acquire the operating business of the
wholly owned Indian subsidiary of ABB Group, Zurich,
viz. ABS Global Industries and Services Ltd. (ABBGISL), for a
consideration of `400cr, as a slump sale on a going concern
basis. The acquisition is expected to generate additional revenue
of approximately `250cr on a full-year basis.
Areva T&D
During the quarter, Areva T&D commissioned India's first
indigenously developed 765kV interconnecting transformer bay
and the Unnao line bay consisting of 765kV transformers, circuit
breakers, current transformers and other equipment.
The transformers of capacity 1,000MVA, 765/400/33 kV
(forming part of Lanco Infratech's 1,200MW Anpara-C Thermal
Power Plant) were designed, manufactured and tested at AREVA
T&D India's power transformer plant in Vadodara.
BHEL
BHEL received the `3,220cr mega contract for installing two
500MW thermal units for the Sagardighi Thermal Power Project
Stage-II by West Bengal Power Development Corporation Ltd.
(WBPDCL). APGENCO also placed a major order worth
`1,445cr to BHEL for the supply and installation of the main
plant package for its power project in Andhra Pradesh. Further,
BHEL together with ABB Sweden was awarded the world's first
800kV, 6000MW ultrahigh voltage multi-terminal DC
transmission link. BHEL's share of the order is worth ~`1,590cr.
BHEL has also bagged the single-largest export order for a gas
turbine-based power plant from Yemen, valued at US $436mn.
KEC International
During the quarter, KEC International received substation orders
of `980cr from Kazakhstan Electricity Grid Operating Company
(KEGOC) for the execution of 38 substations spread across the
Northeast and South of Kazakhstan. The first order is for 21
substations of voltage levels of 1150kV, 500kV and 220kV.
The second order is for 17 substations of voltage levels of 500kV,
220kV and 110kV.
Jyoti Structures
Jyoti Structures has completed the allotment of non-convertible
debentures (NCDs) and detachable warrants to finance its
working capital requirements. The above NCDs are to be
redeemed at the end of 15 months from the date of allotment.
The warrants would have to be exercised within 18 months from
the date of allotment during the periods designated for the
conversion. Excluding the conversion of warrants, the company
would receive `123cr from the issue of NCDs. Assuming full
conversion, the total proceeds from the above issue, including
the conversion of warrants, would be `369cr.
4QFY2011 expectations
We expect companies in our CG universe to post cumulative
top-line growth of 14% yoy on the back of higher execution.
Jyoti Structures and Thermax are expected to post strong growth
of 28% and 25% yoy, respectively. KEC International is expected
to maintain steady top-line growth of 16%. BGR Energy is
expected to report a decline of 10%, mainly on account of high
base. In the T&D segment, we expect ABB and Areva to report
steady top-line growth of 15% and 20%, respectively, while
Crompton Greaves is expected to witness growth of 11%.
On the operating front, we expect companies in our CG universe
to maintain margins, despite higher commodity prices. Though
Jyoti Structures is likely to post 28% top-line growth, we expect
the company to witness margin contraction of 234bp to 10.8%.
Crompton Greaves is likely to post a 190bp margin contraction.
BGR Energy and KEC International are expected to report a
slight improvement in margins to 11.3% and 10.3%, respectively.
BHEL has reported provisional figures for FY2011 with top line
and bottom line of `43,451cr and `6,021cr, respectively.
After adjusting for the new accounting policy, the company's
top line stands at `40,995cr, slightly higher than our FY2011
estimate of `40,234cr. In line with the provisional figures, our
4QFY2011 top line and bottom line estimates are revised to
`19,336cr and `2,880cr.
Outlook
The slowdown in IIP numbers during the past few months
indicates early signs of a possible slowdown in industrial growth.
In addition, hardening interest rates, higher inflation and
elevated crude prices are the downside risks to industrial
and GDP growth.
Almost all companies in our CG universe are highly dependent
on the generation and T&D segments of the power sector.
The generation segment has attracted increasing domestic
competition in addition to Chinese imports. In the transmission
segment, companies such as ABB and Areva T&D have
consistently lost ground to low-price imports from China and
Korea. However, with the government mandating domestic
manufacturing to be a pre-requisite to bid for NTPC and PGCIL
tenders, we expect the flow of imports to temporarily slow down,
thereby benefitting domestic companies. Foreign companies can
still enter into joint ventures with local manufacturers and supply
equipment manufactured at Indian facilities. However, similar
restrictions do not apply to private sector projects, which can
place direct orders with foreign companies. Post the recent spate
of equipment orders placed with Chinese companies, we expect
other private sector power projects to follow suit.
KEC International and Jyoti Structures are expected to benefit
from the capex plans of PGCIL and other state utilities. With
increasing number of power projects likely to be commissioned
over the next couple of years, we expect work orders for setting
up transmission facilities to be released over the next 3-4 months,
especially by PGCIL as the recent FPO proceeds are likely to be
utilised for setting up transmission assets.
On the valuation front, we believe most companies in our
CG universe are presently trading at premium valuations,
offering meager upside from current levels. In such a scenario,
we prefer a stock-specific approach. Crompton Greaves,
KEC International, BGR Energy and Jyoti Structures are among
our preferred picks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The capital goods (CG) index was the major loser during
4QFY2011, declining 14.1% as compared to the 5.2% fall in
the Sensex. Lower-than-expected IIP growth coupled with the
continuing decline in CG production over the past few months
adversely affected CG stocks during the quarter. In addition to
declining IIP numbers, the fall in new order bookings coupled
with hardening interest rates, delays in land acquisition and
environmental clearances also negatively affected the CG sector.
Valuations corrected significantly during the first two months of
the quarter, before marginally recovering in March 2011.
Despite underperforming the broad-based Sensex for a major
portion of the quarter, valuations of front-line stocks in the
CG index continued to trade at a premium to the Sensex.
Major losers during the quarter were BGR Energy and Jyoti
Structures, which declined by 34.3% and 39.1%, respectively,
in absolute terms. Though BGR Energy reported robust results
for 3QFY2011, the stock was affected in 4QFY2011 due to
poor order intake and low earnings visibility going forward.
During the quarter, Jyoti Structures successfully raised `123cr
through 7% NCD, which would enable the company to
substantially reduce its interest cost going forward. In contrast,
ABB gained 0.6%, despite reporting poor results for 4QCY2010
and reduced order intake for CY2010.
Macros signal slowdown
After reporting strong double-digit growth during the first half
of FY2011, IIP numbers for November 2010-January 2011
have consistently drifted downwards and have settled at
sub-4%, less than 1/4th their pace a year ago. The deceleration
has come on the back of contraction in the manufacturing sector
as a whole. The manufacturing sector, which contributes ~80%
to the IIP, reported ~ 3% growth, while CG production reported
negative growth during the same period. CG production for
December 2010 and January 2011 dipped by 9.3% and 18.6%,
respectively. The overall decline in industrial growth is likely to
reduce the GDP growth rate for 2HFY2011 to less than 8.9%
reported in 1HFY2011.
Deterioration in the macro environment, viz. hardening interest
rates causing the cost of capital to remain high, delays in
environment approvals, coal linkages and land acquisition, has
deferred order finalisation. Going forward, we expect various
CG majors to miss the order inflow guidance for FY2011. In
addition, rising commodity prices over the past few quarters
are likely to affect profit margins of CG companies.
The Indian CG sector continues to be negatively impacted by
increasing competition, especially from China. We believe the
administered currency regime, cheaper finance and the
favourable duty structure under which Chinese companies
operate have enabled them to place their products in Indian
markets at lower prices. Domestic power equipment
manufacturers such as BHEL and L&T have been losing bulk of
the orders to their Chinese counterparts. During 3QFY2011,
various private sector power developers had placed orders worth
over US $12bn to various Chinese power equipment companies.
These orders were placed when the domestic power equipment
industry was in the midst of expanding capacities to meet the
growing demand. Besides, the power transmission and
distribution (T&D) segment has also seen serious competition
from Chinese and Korean majors.
Key developments
ABB
ABB Group, Zurich, has been selected by PGCIL to deliver an
ultrahigh voltage transmission system, worth about US $900mn.
The company has been chosen to execute the Northeast Agra
transmission project along with BHEL, which will deliver the
remainder of the project (worth more than US $1.1bn) over the
next 48 months. The parent company is expected to pass on
~15% of the order value to its Indian subsidiary. ABB Ltd. has
approved the proposal to acquire the operating business of the
wholly owned Indian subsidiary of ABB Group, Zurich,
viz. ABS Global Industries and Services Ltd. (ABBGISL), for a
consideration of `400cr, as a slump sale on a going concern
basis. The acquisition is expected to generate additional revenue
of approximately `250cr on a full-year basis.
Areva T&D
During the quarter, Areva T&D commissioned India's first
indigenously developed 765kV interconnecting transformer bay
and the Unnao line bay consisting of 765kV transformers, circuit
breakers, current transformers and other equipment.
The transformers of capacity 1,000MVA, 765/400/33 kV
(forming part of Lanco Infratech's 1,200MW Anpara-C Thermal
Power Plant) were designed, manufactured and tested at AREVA
T&D India's power transformer plant in Vadodara.
BHEL
BHEL received the `3,220cr mega contract for installing two
500MW thermal units for the Sagardighi Thermal Power Project
Stage-II by West Bengal Power Development Corporation Ltd.
(WBPDCL). APGENCO also placed a major order worth
`1,445cr to BHEL for the supply and installation of the main
plant package for its power project in Andhra Pradesh. Further,
BHEL together with ABB Sweden was awarded the world's first
800kV, 6000MW ultrahigh voltage multi-terminal DC
transmission link. BHEL's share of the order is worth ~`1,590cr.
BHEL has also bagged the single-largest export order for a gas
turbine-based power plant from Yemen, valued at US $436mn.
KEC International
During the quarter, KEC International received substation orders
of `980cr from Kazakhstan Electricity Grid Operating Company
(KEGOC) for the execution of 38 substations spread across the
Northeast and South of Kazakhstan. The first order is for 21
substations of voltage levels of 1150kV, 500kV and 220kV.
The second order is for 17 substations of voltage levels of 500kV,
220kV and 110kV.
Jyoti Structures
Jyoti Structures has completed the allotment of non-convertible
debentures (NCDs) and detachable warrants to finance its
working capital requirements. The above NCDs are to be
redeemed at the end of 15 months from the date of allotment.
The warrants would have to be exercised within 18 months from
the date of allotment during the periods designated for the
conversion. Excluding the conversion of warrants, the company
would receive `123cr from the issue of NCDs. Assuming full
conversion, the total proceeds from the above issue, including
the conversion of warrants, would be `369cr.
4QFY2011 expectations
We expect companies in our CG universe to post cumulative
top-line growth of 14% yoy on the back of higher execution.
Jyoti Structures and Thermax are expected to post strong growth
of 28% and 25% yoy, respectively. KEC International is expected
to maintain steady top-line growth of 16%. BGR Energy is
expected to report a decline of 10%, mainly on account of high
base. In the T&D segment, we expect ABB and Areva to report
steady top-line growth of 15% and 20%, respectively, while
Crompton Greaves is expected to witness growth of 11%.
On the operating front, we expect companies in our CG universe
to maintain margins, despite higher commodity prices. Though
Jyoti Structures is likely to post 28% top-line growth, we expect
the company to witness margin contraction of 234bp to 10.8%.
Crompton Greaves is likely to post a 190bp margin contraction.
BGR Energy and KEC International are expected to report a
slight improvement in margins to 11.3% and 10.3%, respectively.
BHEL has reported provisional figures for FY2011 with top line
and bottom line of `43,451cr and `6,021cr, respectively.
After adjusting for the new accounting policy, the company's
top line stands at `40,995cr, slightly higher than our FY2011
estimate of `40,234cr. In line with the provisional figures, our
4QFY2011 top line and bottom line estimates are revised to
`19,336cr and `2,880cr.
Outlook
The slowdown in IIP numbers during the past few months
indicates early signs of a possible slowdown in industrial growth.
In addition, hardening interest rates, higher inflation and
elevated crude prices are the downside risks to industrial
and GDP growth.
Almost all companies in our CG universe are highly dependent
on the generation and T&D segments of the power sector.
The generation segment has attracted increasing domestic
competition in addition to Chinese imports. In the transmission
segment, companies such as ABB and Areva T&D have
consistently lost ground to low-price imports from China and
Korea. However, with the government mandating domestic
manufacturing to be a pre-requisite to bid for NTPC and PGCIL
tenders, we expect the flow of imports to temporarily slow down,
thereby benefitting domestic companies. Foreign companies can
still enter into joint ventures with local manufacturers and supply
equipment manufactured at Indian facilities. However, similar
restrictions do not apply to private sector projects, which can
place direct orders with foreign companies. Post the recent spate
of equipment orders placed with Chinese companies, we expect
other private sector power projects to follow suit.
KEC International and Jyoti Structures are expected to benefit
from the capex plans of PGCIL and other state utilities. With
increasing number of power projects likely to be commissioned
over the next couple of years, we expect work orders for setting
up transmission facilities to be released over the next 3-4 months,
especially by PGCIL as the recent FPO proceeds are likely to be
utilised for setting up transmission assets.
On the valuation front, we believe most companies in our
CG universe are presently trading at premium valuations,
offering meager upside from current levels. In such a scenario,
we prefer a stock-specific approach. Crompton Greaves,
KEC International, BGR Energy and Jyoti Structures are among
our preferred picks.
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