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CAPITAL GOODS & POWER
The capital goods index has clearly lost further momentum in the first
quarter of FY12. Few pointers.
q While for April 2011, capital goods index posted a healthy growth of
14.5% yoy, we expect to see moderation in the following months as the
underlying investment trend is weak. Consumer durables grew at a slow
pace of 3.8% yoy in April 2011.
q Gross fixed capital formation has declined from 17.4% in the first quarter
of 2010-11 to a mere 0.4% in the fourth quarter of 2010-11.
q The total outstanding project investment as of March 2011 grew at a
lower rate of 16.1% as against 22.9% recorded a year ago. Fall in fresh
investment by the Private sector was the main reason for the overall decline
in project investment.
q Increasing protests from land owners, environmentalists, uncertainty
over the availability of raw materials in the form of coal or iron ore mining
leases, saw more number of projects being stalled by promoters in
FY11. In all, the year saw 692 projects worth Rs 1,702 bn put on the back
burner by project promoters. During FY10, 477 projects worth Rs 1512 bn
were abandoned by the promoters.
q Major capital goods players have pointed out that apart from the policy
related bottlenecks, higher interest rates are resulting in longer project
finsalisation cycle.
q Another area to monitor is the material prices which have been ruling
high (though they are off from highs). Managements have generally been
cautious on margin outlook.
Preview Highlights
n We expect aggregate revenue growth of 19% yoy in the first quarter, driven
mainly by BHEL, L&T, Suzlon.
n Aggregate EBITDA is expected to grow at a smart rate of xx% yoy mainly driven
by BHEL and L&T.
n Aggregate PAT excluding Suzlon is expected to grow 20% yoy in Q1 FY12.
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 Havells India, Voltas,
Greaves Cotton, Diamond Power and Bajaj Electricals.
Stock Performance
By and large, the capital goods sector stocks remained lackluster for the quarter.
Weak order intake and rise in material prices were the main concerns which led to
the derating of stocks. L&T was the standout performer for the quarter on the back
of strong set of Q4 numbers that surprised the market. BHEL reported strong numbers
for Q4 which were partly boosted by accounting changes. This along with
government's decision to sell 5% equity in the company led to sell-off in the stock.
Thermax, Voltas and Blue Star disappointed with their Q4 FY11 order intake, which
weighed on their stock prices. Mid-caps like Time Technoplast and Everest Kanto
outperformed on the back of strong Q4 numbers. .
Forex Scenario
Rupee has been largely stable during the quarter against the USD but has depreciated
by 2% against the Euro. Positive for CGL and Havells 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: We expect strong execution momentum to continue in FY12 as the company
has a robust order backlog. However, market is more concerned on the
broader issues concerning the growth of power sector. Government divestment
of 5% stake also remains an overhang on the stock.
n ABB: ABB had reported better than expected numbers primarily due to higher
revenue booking during the quarter. While margins have recovered from the
lows in CY10, it still continues to remain depressed. Order intake has been flat in
Q1 CY11. 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 the industrial and consumer 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 compared to the previous quarter.
n Areva: The business environment for Areva continues to be challenging due to
excess capacity in the system and deferral of large power and infrastructure
projects. PGCIL has also modified its bidding norms to accommodate higher competition.
We remain doubtful of the company's ability to sustain robust growth
rate in coming quarters in view of flattish order backlog and likely slowdown in
industrial and project activity. The operations of Areva T&D have been acquired
by a consortium of Alstom and Schneider Electric. Accordingly, the high voltage
and power electronics business will be retained by Alstom while the medium
voltage segment shall house under Schneider Electric. To give effect to arrangement,
the medium voltage business will be demerged from Areva T&D.
n Voltamp: The company's transformer business continues to reel under pricing
pressure. The management has taken a cautious approach on taking orders
given instances of payment delays from customers.
n Larsen & Toubro: The street was pleasantly surprised by the significant order
intake in Q4 FY11. Since then the stock has remained strong and outperformed
the market as well as the sector. Key parameters to monitor would be execution
momentum (cement volumes have been flat in Q1 FY12), impact of material
prices on margins and order intake outlook.
n Cummins India: We expect resilient domestic market sales on back of power
and industrial segments along with significant YoY improvement in export sales.
Company is likely to observe slight moderation in its margin at EBITDA and PAT
levels.
n Hind Dorr Oliver: The company's Q4 FY11 numbers were highly disappointing
on order intake as well as profitability front. The company is present in environmental
engineering, mineral beneficiation and manufacturing of heat exchangers.
In the mineral beneficiation segment, environmental clearance has stalled
several ongoing as well as proposed projects which has directly impacted the
company's order intake.
n Thermax: The company has ended FY11 with a moderate increase in order
backlog which will retard its revenue growth in current fiscal. The management
has been highlighting that capacity creation in the industry has taken a hit due to
environment compliance issues and higher interest rates.
n Voltas: The FY11 numbers of Voltas has been affected by stagnant overseas
order backlog and loss in its subsidiary Rohini Electricals. The management has
indicated that Rohini Electricals should substantially reduce its losses in FY12. On
the consumer durables side, the Q1 FY12 is the peak season. However, due to
late start of summer heat in most parts of India and early showers, the offtake of
room ACs has been well below expectations. The management has indicated
that as a result, competitors are sitting with substantial inventory, which will put
pressure on product prices.
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
Q1FY12 driven by favourable product mix.. 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.
n Greaves Cotton: The 3W volumes of GCL's prime OEM ie Piaggio has shown
signs of weakening in April but has recovered in May (-3% and 10.2% yoy in
April and May 2011). GCL is the sole supplier of engines to Tata Motor's LCV in
0.5 ton range named Magic Iris. The model was launched in May 2011. We
expect significant push to volume growth in FY12 from this model.
n Diamond Power Infrastructure (DPIL): The demand for HT cables has been
strong but EPC segment has been sluggish. We project moderation in growth for
the company in FY12. The company has recently commissioned the EHV cables
and transmission towers plant which should make a meaningful contribution to
revenues in FY13.
n Bajal Electricals Limited (BAEL): We expect BAEL to report meaningful growth
in revenues in Q1 FY12 aided by robust growth in consumer appliances business.
Domestic business is likely to report meaningful growth on account of robust demand
from tier II and tier III cities.
n AIA Engineering Ltd (AIA): AIA is expected to report robust growth in revenues
as well as profits in Q1FY12. This would mainly be on account of continued up
tick in new market creation in mining space.
n Gujarat Apollo Ltd: GAL is expected to report moderate YoY growth in
Q1FY12. NHAI awarded record orders in Q4FY11 which are likely to create demand
in 2HYFY12. We expect company to maintain margins in the Quarter.
n Tractors India Limited (TIL): TIL is expected to report moderate increase in
sales for the quarter. We believe that the sluggish infrastructure spending and
rising interest rate scenario pose a negative impact on company's growth.
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 strong growth in revenues on the back
of pick up in demand for CNG cylinders and higher realisations. We expect lower
losses at its US subsidiary.
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. HDPE prices (main feedstock) has cooled off lately,
which is a positive.
Power
n NTPC: Commercial generation in Q1 FY12 has been sedate at 55 bn units up
1.6% yoy. In the power sector, we prefer NTPC given low exposure to merchant
power rates and relative better placed in terms of fuel availability.
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