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Earnings bottoming out; valuations look
attractive even in worst case scenario
Fat order books to drive earnings growth;
competitive outlook also improving
Downgrade Siemens to Neutral, upgrade
ATD to OW; still prefer CRG and KPP
The focus shifts to project execution. We think the market will
switch its focus from order books to profit growth this year.
With strong growth in transmission orders (c50%) and sector
backlog (c17%) in FY11, investors will want to see these fat order
books translate into earnings growth in FY12, with no project
delays. In this context, we believe the sector outlook remains
strong as companies should be able to deliver on time thanks to
recent capacity addition. We forecast sales growth of c17% in
FY12e and c18% in FY13e, up from c11% in FY11.
Order books to continue to grow. While we expect transmission
orders to be weak in the short term (-c5% in FY12e but +c40%
in FY13e), the sector backlog should continue to grow (c12% in
FY12e and c18% in FY13e), benefiting from international demand
and above-normal growth in new business ventures.
Competition still intense but dynamics improving. Our channel
checks suggest that while competition remains intense in the
transformer and tower segments, the dynamics are slowly
changing in favour of the major players we cover. While changes
in qualification requirements are helping transformer vendors,
EPC players are benefiting from Power Grid’s increasing focus on
project execution, an area where some new entrants struggle.
Expectations nearing bottom, execution remains key:
With earnings disappointing for three out of the last four
quarters, consensus has come down c13% and our universe has
underperformed by c6.8%(c15.5% ex-ABB and Siemens) in
spite of rising order books. This implies that execution is
becoming crucial and will be the likely driver for re-rating.
Sector looks attractive, even in worst case scenario:
Our coverage universe remains at a discount of c12% (c30%
ex-ABB and Siemens) to its historical average. The current
valuation implies a sector margin decline of c180bps, which we
think is highly unlikely; even in a worst case scenario, we estimate
the risk to our FY12-13e EPS is only c5-14%. Hence, we find the
sector attractive on a risk adjusted basis.
Ratings changes: We downgrade Siemens to Neutral and upgrade
ATD to Overweight on valuation. We still prefer CRG and KPP,
as they provide strong growth opportunities at an attractive price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Earnings bottoming out; valuations look
attractive even in worst case scenario
Fat order books to drive earnings growth;
competitive outlook also improving
Downgrade Siemens to Neutral, upgrade
ATD to OW; still prefer CRG and KPP
The focus shifts to project execution. We think the market will
switch its focus from order books to profit growth this year.
With strong growth in transmission orders (c50%) and sector
backlog (c17%) in FY11, investors will want to see these fat order
books translate into earnings growth in FY12, with no project
delays. In this context, we believe the sector outlook remains
strong as companies should be able to deliver on time thanks to
recent capacity addition. We forecast sales growth of c17% in
FY12e and c18% in FY13e, up from c11% in FY11.
Order books to continue to grow. While we expect transmission
orders to be weak in the short term (-c5% in FY12e but +c40%
in FY13e), the sector backlog should continue to grow (c12% in
FY12e and c18% in FY13e), benefiting from international demand
and above-normal growth in new business ventures.
Competition still intense but dynamics improving. Our channel
checks suggest that while competition remains intense in the
transformer and tower segments, the dynamics are slowly
changing in favour of the major players we cover. While changes
in qualification requirements are helping transformer vendors,
EPC players are benefiting from Power Grid’s increasing focus on
project execution, an area where some new entrants struggle.
Expectations nearing bottom, execution remains key:
With earnings disappointing for three out of the last four
quarters, consensus has come down c13% and our universe has
underperformed by c6.8%(c15.5% ex-ABB and Siemens) in
spite of rising order books. This implies that execution is
becoming crucial and will be the likely driver for re-rating.
Sector looks attractive, even in worst case scenario:
Our coverage universe remains at a discount of c12% (c30%
ex-ABB and Siemens) to its historical average. The current
valuation implies a sector margin decline of c180bps, which we
think is highly unlikely; even in a worst case scenario, we estimate
the risk to our FY12-13e EPS is only c5-14%. Hence, we find the
sector attractive on a risk adjusted basis.
Ratings changes: We downgrade Siemens to Neutral and upgrade
ATD to Overweight on valuation. We still prefer CRG and KPP,
as they provide strong growth opportunities at an attractive price.
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