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CAPITAL GOODS & POWER
Diverging from its trend of robust growth in the first half of the year, the
capital goods index has clearly lost steam in recent months. For the month
of January 2011, capital goods index shrunk 18.6% yoy. While higher base of
previous year certainly contributed to the sharp fall but it is also a fact that
new project activity has slowed down appreciably in the past six months.
Management commentary indicates that order enquiries have been
continuously improving, but project finalisation is getting delayed as
project investors are indecisive amidst signs of GDP slowdown and high
interest rates. Projects from state-owned entities have also been affected as
the government has been in a fire-fighting mode after the 2G and CWG
fiasco. Apart from this, longer cycle time on land acquisition and
environmental clearance has also added to lackluster project activity.
However, off-late there is some evidence of an uptick in ordering activity.
Feedback from the Roads as well as Power T&D side is indicative of this.
Also, several large infrastructure projects have recently been cleared by the
MOEF. We expect project activity to improve further in May after the
completion of assembly elections in five states.
Another area to monitor is the material prices which have also inched up in
Q4. Most management have maintained that they should be able to
maintain margins but a minor decline in margins cannot be ruled out.
Preview Highlights
n We expect aggregate revenue growth of 20.7% yoy in the fourth quarter, driven
mainly by BHEL, L&T, Thermax and Cummins.
n Aggregate EBITDA is expected to grow at a smart rate of 29.5% yoy mainly
driven by reduced margins in BHEL, Havells and Thermax.
n Aggregate PAT is expected to grow 40% yoy in Q4.
n The business outlook for Capital Goods remains healthy but it is nowhere closer
to the boom times in FY06-07.
n To profit from the capital goods sector, we recommend investors to follow a
stock specific buying strategy.
n We would recommend selective buying in stocks like L&T, Gujarat Apollo,
Cummins India, Havells India, TIL Voltas, Greaves Cotton, Diamond Power and
Hind Dorr Oliver.
Stock Performance
The capital goods sector stocks posted losses during the quarter. Weak order intake
and rise in material prices was the main concern which led to the derating of stocks.
L&T, Thermax and Voltas disappointed with their Q3 FY11 order intake. Siemens
announced its open offer for 20% public shareholding at a price of Rs 930, which
was at a significant premium to ruling price. The open offer is currently on.
Material price scenario
During the quarter, average price of HR steel coils was up 24% yoy to Rs 44182 per
ton. Steel prices are up even on a sequential basis.
Average price of copper which is the prime raw material for electrical equipment
has increased 32% yoy in the quarter. The effect of this would be in terms of higher
revenues but downward pressure on EBITDA margins coupled with increased inventory.
Forex Scenario
Rupee has been largely stable during the quarter against the USD and Yen but has
depreciated by 5.7% against the Euro. Positive for CGL given large share of its overseas
operations are Euro-denominated.
Stock view
n Suzlon: We expect another set of poor results from Suzlon as the combined impact
of lower up tick in international business and higher interest costs eroding
profitability. Although company has succeeded in increasing its order book recently
in the domestic market and this could be a positive for the company going
ahead. The stock has underperformed the broader market in the past and order
book growth remains a key variable to monitor.
n BHEL: The company has already come out with provisional numbers for FY11.
While execution has been strong during the year, profit figures got a leg-up from
changes in accounting for warranty provisions. The company was also able to
meet its order intake guidance of Rs 600 bn in FY11.
n ABB: ABB had reported another disappointing set of numbers in Q4 CY10 a reflection
of orders won at very low margins as well as loss of business from rural
electrification projects. The company had also reported drop in order intake in
Q4 CY10. The power transformer sector is going through margin pressure as
players have been undercutting prices to utilize their capacity.
n Crompton Greaves: CGL should report healthy earnings for the quarter mainly
driven by continued momentum in domestic power business and lower interest
charges. Raw material prices could have a minor impact on the EBITDA margins.
The company is cash surplus at standalone level and has a minor net debt at
consolidated level.
n Siemens: We forecast healthy revenue growth for Siemens as the company has
started the year with a 32% increase in order book. Margins are likely to moderate
slightly as in 2HYFY10 recorder extra-normal margins.
n Areva: The company had come out with good set of numbers in Q4 CY10. We
expect revenue growth of 10% yoy and a sharp rise in profit growth (mainly due
to low base). CY10 order intake was flat. The management has highlighted sluggish
ordering, land acquisition issues and intense competition slowing down revenue
growth.
n Voltamp: In line with other transformer makers, the company reported sharply
lower EBITDA margins in Q3 FY11 and has guided for margin pressure for FY12
as well. We expect sharp decline in margins to result in degrowth in profits. But
margins are at historically low levels and close to bottoming out in our view.
n Larsen & Toubro: The street was disappointed by the significant slippage in order
intake in Q3 FY11. Even in the Q4 the order announcements have been very
weak. In all likelihood, the company may end the year with significant slippage
in order intake vs original guidance. We do not anticipate any major slowdown
on the execution front and the company should finish the year within striking
distance of its revenue guidance of 20% in FY11. The company has recently
completed financial closure of Hyderabad Metro Project which will add close to
Rs 125 bn to its order backlog.
n Cummins India: We expect further strength in domestic market sales on back
of power and industrial segments along with significant YoY improvement in export
sales. Company is likely to maintain its margin at EBITDA and PAT levels.
n Hind Dorr Oliver: The company has been an underperformer in the engineering
universe in FY11 as order backlog has remained stagnant for quite some time.
We expect profit growth to moderate in FY12.
n Thermax: We expect the company to post excellent revenue and profit growth
as the company had begun the fiscal with a very strong order backlog. However,
weak order intake in Q3 and possibly Q4 as well may result in the company finishing
the year with moderate rise in carryover orders. Thus, we expect revenue
growth to moderate in FY12.
n Voltas: The 9MFY11 numbers of Voltas has been affected by stagnant overseas
order backlog and loss in its subsidiary Rohini Electricals. Given sedate order
backlog in FY11, we expect moderate profit growth for the company in FY12.
n Bharat Electronics: Order backlog of the company has virtually doubled by the
end of FY11 and the company is well positioned to drive healthy revenue growth
in the medium term.
n Kalpataru Power Transmission: KPTL is likely to maintain its margins in
Q4FY11. Company should report decent growth in sales and profits. We would
be closely monitoring the growth in order book which has remained muted in
past few quarters and should be a key variable for stock performance.
n Greaves Cotton: We expect robust profit growth in Q3 FY11 aided by consistently
high margins and healthy 3W volumes.
n Diamond Power Infrastructure (DPIL): We expect DPIL to report impressive
set of numbers for Q4 FY11 aided by ramp-up in its cables capacity. The company
is expected to commission its EHV cables plant in Q1 FY12, which would
aid revenue growth in FY12.
n AIA Engineering Ltd (AIA): AIA is expected to report robust growth in revenues
as well as profits in Q4. This would mainly be on account of continued up tick in
new market creation in mining space. Cement and power sectors are expected
to report healthy replacement demand for mill internals.
n Gujarat Apollo Ltd: GAL should report muted YoY growth in Q4FY11E mainly
due to the spill over of awarding of major road projects from NHAI into FY12
from FY11.We expect company to maintain margins in the Quarter.
n Tractors India Limited (TIL): TIL nos are not comparable as company has restructures
the Caterpillar business into its fully owned subsidiary TIPL. However
we expect the company to report increasing sales trend driven by demand from
ports and power sector.
n Havells India Ltd (HIL): HIL is likely to report meaningful YoY growth in net
profits. Sylvania restructuring should progress in positive direction and is expected
to aid to operating margins. Domestic business is likely to report meaningful
growth on account of robust demand from tier II and tier III cities.
n Everest Kanto: We expect EKC to report growth in revenues on the back of
pick up in demand for CNG cylinders and higher realisations. The operating
margins would be higher on YoY basis as high cost inventory has been liquidated.
n Time Technoplast: We expect strong growth in revenues and profitability of TTL
due to increased contribution from the newer products like high pressure pipes
and prefabricated shelters. Also due to pick up in the industrial activity we expect
increased business from the industrial packaging, battery, healthcare and infrastructure
vertical.
Power
n NTPC: The company has already announced its provisional numbers for FY11.
Power generation during the year has been hit due to lower offtake by SEBs. The
power sector has several issues to grapple with including fuel supply concerns,
deteriorating financial health of SEBs and delay in land acquisition.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CAPITAL GOODS & POWER
Diverging from its trend of robust growth in the first half of the year, the
capital goods index has clearly lost steam in recent months. For the month
of January 2011, capital goods index shrunk 18.6% yoy. While higher base of
previous year certainly contributed to the sharp fall but it is also a fact that
new project activity has slowed down appreciably in the past six months.
Management commentary indicates that order enquiries have been
continuously improving, but project finalisation is getting delayed as
project investors are indecisive amidst signs of GDP slowdown and high
interest rates. Projects from state-owned entities have also been affected as
the government has been in a fire-fighting mode after the 2G and CWG
fiasco. Apart from this, longer cycle time on land acquisition and
environmental clearance has also added to lackluster project activity.
However, off-late there is some evidence of an uptick in ordering activity.
Feedback from the Roads as well as Power T&D side is indicative of this.
Also, several large infrastructure projects have recently been cleared by the
MOEF. We expect project activity to improve further in May after the
completion of assembly elections in five states.
Another area to monitor is the material prices which have also inched up in
Q4. Most management have maintained that they should be able to
maintain margins but a minor decline in margins cannot be ruled out.
Preview Highlights
n We expect aggregate revenue growth of 20.7% yoy in the fourth quarter, driven
mainly by BHEL, L&T, Thermax and Cummins.
n Aggregate EBITDA is expected to grow at a smart rate of 29.5% yoy mainly
driven by reduced margins in BHEL, Havells and Thermax.
n Aggregate PAT is expected to grow 40% yoy in Q4.
n The business outlook for Capital Goods remains healthy but it is nowhere closer
to the boom times in FY06-07.
n To profit from the capital goods sector, we recommend investors to follow a
stock specific buying strategy.
n We would recommend selective buying in stocks like L&T, Gujarat Apollo,
Cummins India, Havells India, TIL Voltas, Greaves Cotton, Diamond Power and
Hind Dorr Oliver.
Stock Performance
The capital goods sector stocks posted losses during the quarter. Weak order intake
and rise in material prices was the main concern which led to the derating of stocks.
L&T, Thermax and Voltas disappointed with their Q3 FY11 order intake. Siemens
announced its open offer for 20% public shareholding at a price of Rs 930, which
was at a significant premium to ruling price. The open offer is currently on.
Material price scenario
During the quarter, average price of HR steel coils was up 24% yoy to Rs 44182 per
ton. Steel prices are up even on a sequential basis.
Average price of copper which is the prime raw material for electrical equipment
has increased 32% yoy in the quarter. The effect of this would be in terms of higher
revenues but downward pressure on EBITDA margins coupled with increased inventory.
Forex Scenario
Rupee has been largely stable during the quarter against the USD and Yen but has
depreciated by 5.7% against the Euro. Positive for CGL given large share of its overseas
operations are Euro-denominated.
Stock view
n Suzlon: We expect another set of poor results from Suzlon as the combined impact
of lower up tick in international business and higher interest costs eroding
profitability. Although company has succeeded in increasing its order book recently
in the domestic market and this could be a positive for the company going
ahead. The stock has underperformed the broader market in the past and order
book growth remains a key variable to monitor.
n BHEL: The company has already come out with provisional numbers for FY11.
While execution has been strong during the year, profit figures got a leg-up from
changes in accounting for warranty provisions. The company was also able to
meet its order intake guidance of Rs 600 bn in FY11.
n ABB: ABB had reported another disappointing set of numbers in Q4 CY10 a reflection
of orders won at very low margins as well as loss of business from rural
electrification projects. The company had also reported drop in order intake in
Q4 CY10. The power transformer sector is going through margin pressure as
players have been undercutting prices to utilize their capacity.
n Crompton Greaves: CGL should report healthy earnings for the quarter mainly
driven by continued momentum in domestic power business and lower interest
charges. Raw material prices could have a minor impact on the EBITDA margins.
The company is cash surplus at standalone level and has a minor net debt at
consolidated level.
n Siemens: We forecast healthy revenue growth for Siemens as the company has
started the year with a 32% increase in order book. Margins are likely to moderate
slightly as in 2HYFY10 recorder extra-normal margins.
n Areva: The company had come out with good set of numbers in Q4 CY10. We
expect revenue growth of 10% yoy and a sharp rise in profit growth (mainly due
to low base). CY10 order intake was flat. The management has highlighted sluggish
ordering, land acquisition issues and intense competition slowing down revenue
growth.
n Voltamp: In line with other transformer makers, the company reported sharply
lower EBITDA margins in Q3 FY11 and has guided for margin pressure for FY12
as well. We expect sharp decline in margins to result in degrowth in profits. But
margins are at historically low levels and close to bottoming out in our view.
n Larsen & Toubro: The street was disappointed by the significant slippage in order
intake in Q3 FY11. Even in the Q4 the order announcements have been very
weak. In all likelihood, the company may end the year with significant slippage
in order intake vs original guidance. We do not anticipate any major slowdown
on the execution front and the company should finish the year within striking
distance of its revenue guidance of 20% in FY11. The company has recently
completed financial closure of Hyderabad Metro Project which will add close to
Rs 125 bn to its order backlog.
n Cummins India: We expect further strength in domestic market sales on back
of power and industrial segments along with significant YoY improvement in export
sales. Company is likely to maintain its margin at EBITDA and PAT levels.
n Hind Dorr Oliver: The company has been an underperformer in the engineering
universe in FY11 as order backlog has remained stagnant for quite some time.
We expect profit growth to moderate in FY12.
n Thermax: We expect the company to post excellent revenue and profit growth
as the company had begun the fiscal with a very strong order backlog. However,
weak order intake in Q3 and possibly Q4 as well may result in the company finishing
the year with moderate rise in carryover orders. Thus, we expect revenue
growth to moderate in FY12.
n Voltas: The 9MFY11 numbers of Voltas has been affected by stagnant overseas
order backlog and loss in its subsidiary Rohini Electricals. Given sedate order
backlog in FY11, we expect moderate profit growth for the company in FY12.
n Bharat Electronics: Order backlog of the company has virtually doubled by the
end of FY11 and the company is well positioned to drive healthy revenue growth
in the medium term.
n Kalpataru Power Transmission: KPTL is likely to maintain its margins in
Q4FY11. Company should report decent growth in sales and profits. We would
be closely monitoring the growth in order book which has remained muted in
past few quarters and should be a key variable for stock performance.
n Greaves Cotton: We expect robust profit growth in Q3 FY11 aided by consistently
high margins and healthy 3W volumes.
n Diamond Power Infrastructure (DPIL): We expect DPIL to report impressive
set of numbers for Q4 FY11 aided by ramp-up in its cables capacity. The company
is expected to commission its EHV cables plant in Q1 FY12, which would
aid revenue growth in FY12.
n AIA Engineering Ltd (AIA): AIA is expected to report robust growth in revenues
as well as profits in Q4. This would mainly be on account of continued up tick in
new market creation in mining space. Cement and power sectors are expected
to report healthy replacement demand for mill internals.
n Gujarat Apollo Ltd: GAL should report muted YoY growth in Q4FY11E mainly
due to the spill over of awarding of major road projects from NHAI into FY12
from FY11.We expect company to maintain margins in the Quarter.
n Tractors India Limited (TIL): TIL nos are not comparable as company has restructures
the Caterpillar business into its fully owned subsidiary TIPL. However
we expect the company to report increasing sales trend driven by demand from
ports and power sector.
n Havells India Ltd (HIL): HIL is likely to report meaningful YoY growth in net
profits. Sylvania restructuring should progress in positive direction and is expected
to aid to operating margins. Domestic business is likely to report meaningful
growth on account of robust demand from tier II and tier III cities.
n Everest Kanto: We expect EKC to report growth in revenues on the back of
pick up in demand for CNG cylinders and higher realisations. The operating
margins would be higher on YoY basis as high cost inventory has been liquidated.
n Time Technoplast: We expect strong growth in revenues and profitability of TTL
due to increased contribution from the newer products like high pressure pipes
and prefabricated shelters. Also due to pick up in the industrial activity we expect
increased business from the industrial packaging, battery, healthcare and infrastructure
vertical.
Power
n NTPC: The company has already announced its provisional numbers for FY11.
Power generation during the year has been hit due to lower offtake by SEBs. The
power sector has several issues to grapple with including fuel supply concerns,
deteriorating financial health of SEBs and delay in land acquisition.
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