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India Equity Research Reports, IPO and Stock News
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Q1FY12 was a lackadaisical quarter for the sector with revenue growth at
14.8% Y-o-Y. Core OPMs remained under pressure (ex BHEL, Punj Lloyd)
owing to input cost pressures. Further, rising interest cost marred the
sector’s profitability with profit margins dipping 80bps to 6.9%. Order
intake for the sector dipped 17% Y-o-Y to INR 302 bn, courtesy BHEL,
whose order intake took a massive 75% tumble. We remain cautious on
the overall execution pick up in the sector over the next few quarters
owing to the prevailing macro headwinds.
Macro headwinds took a toll on execution
Execution in the sector was decent during Q1FY12, up 14.8% Y-o-Y against our
expectation of 19.0%. Amongst large caps, BHEL, Crompton Greaves, Cummins and ABB
reported dismal set of numbers, much below ours and Street expectations. Project
deferments and client issues took a toll on execution of companies in the power T&D
space. We remain cautious on the overall execution pick up in the sector over the next
few quarters owing to the prevailing macro headwinds.
Rising input costs and interest rates hurt profitability
Over the past few quarters, raw material prices have touched new highs, pressurising
margins. High input costs continued to impact the sector with EBITDA margins sliding
110bps Y-o-Y to 11.2%. Rising interest costs further singed the sector’s profitability,
leading to flat profit growth, lowest in the past three quarters.
Inflationary pressures dent order inflow
Order inflow was sluggish, primarily due to an overall slowdown owing to inflationary
pressures apart from various other issues such as environmental clearance, coal linkage
issues, among others, which led to project deferrals. Order intake for the sector
declined 17% Y-o-Y to INR 302 bn, courtesy BHEL, whose order intake took a massive
75% tumble.
Outlook: Cautious; stay selective
Q1FY12 was tepid in terms of ordering momentum owing to limited tender awards in
power and infrastructure (ex roads) in the country and do not expect any major pick up
in Q2FY12 as well; we expect ordering momentum to pick up pace only in H2FY12. Also,
we expect H2FY12 to see higher interest cost and input cost impact eating into the
sector’s profitability, those some respite is likely from declining input cost as low cost
inventory is utilised. In our view, pricing pressure is likely to continue in the T&D space
and also expect heightened competition in the BTG space. Hence, we prefer diversified
entities like L&T and Siemens in the large-cap space.
Top Picks: L&T, Havells, KEC International, Siemens
Q1FY12 results threw up major negative surprises
• Crompton Greaves (CG) delivered a big negative surprise with loss in its overseas
power systems division and a sharp dip in domestic EBIT margin. Management
slashed FY12 blended EBIDTA guidance drastically to just about 8-10% from 13-14%.
• BHEL’s Q1FY12 sales were way below our expectation largely owing to issues at
Mumbai port (due to which components’ import was delayed), which impacted the
company’s plant commissioning during the quarter; this resulted in a mere 8% Y-o-Y
revenue growth. Also, lack of overall awards in the power sector led to BHEL’s order
intake dipping a massive 75% Y-o-Y to INR 24.7 bn.
• Bajaj Electricals’ (BJE) Q1FY12 numbers were below our and consensus estimates.
While revenue for the quarter grew 13%, earnings dipped 51% as the company
incurred expenses on closure of several old/stuck projects to free up working capital
and bring in more efficiency in employee costs.
SECTOR SNAPSHOT
Sector: BTG (BHEL, Thermax, BGR Energy)
• Management commentary: Maintaining aggressive order intake guidance for FY12.
• Order intake: While Industry orders for Thermax were better than expectation,
utility orders posted a sharp dip.
• Execution: Much below expectation, except for Thermax; sector likely to face
execution challenges in ensuing quarters.
• Margins: H1FY12 to remain under pressure; H2FY12 should see some improvement
in margins as input costs decline.
• Key trigger: BTG tender awards expected in 3-5 months/ import duty imposition.
Sector: T&D equipment (Siemens, ABB, Crompton)
• Management commentary: Industry overcapacity and foreign competition to keep
pricing under pressure.
• Order intake: The power segment including CRG witnessed muted ordering owing to
limited tendering in the sector.
• Execution: Continued deferments impacted execution growth.
• Margins: Margin recovery unlikely owing to intense competition.
• Key trigger: Sharp uptick in T&D project awards.
Sector: T&D EPC (KEC, JSL, KPTL)
• Management commentary: Execution not in tandem with order intake momentum.
• Order intake: T&D EPC market expected to grow at 10-15% in FY12E with most
tenders being back ended. Export market has seen decent momentum in Q1FY12.
• Execution: In line with expectations; momentum likely to continue.
• Margins: Although margins were well guarded, profitability was hit on account of
rising interest cost.
• Key trigger: Pick up in execution and continued ordering momentum in key markets
including US, MENA, etc.
Sector: Diversified Infra (L&T, Voltas, Punj Llyod)
• Management commentary: Banking on export market incrementally. Cautiously
optimistic outlook in the near to medium term.
• Order intake: In line with expectations except Voltas. L&T likely to get Middle East
boost in order intake.
• Execution: In line with expectations; likely to remain strong owing to a decent
revenue growth visibility, barring Voltas.
• Margins: Marginally below expectations. Profitability could further get impacted
owing to continued interest cost impact and input cost pressures.
• Key trigger: Improving macro scenario like softening of interest rates and overall
pick up in industrial capex, coupled with softening of input cost pressures.
Sector: Consumer durables (Havells, Bajaj Electricals, Crompton, Voltas)
• Management commentary: Slower sales of fans, coolers, air conditioners due to
summer not being harsh, lower construction activities, and interest rate pressures.
• Execution: Below expectations except Havells which recorded strong growth in
international markets. Revenue growth may be a challenge in the near term due to
high inflation and rising interest rates.
• Margins: Below expectations as commodity prices were high. The sector may post
some margin improvement in the near term after softening of commodity prices.
• Key trigger: Launching of new appliances/easing of inflationary pressures.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Q1FY12 was a lackadaisical quarter for the sector with revenue growth at
14.8% Y-o-Y. Core OPMs remained under pressure (ex BHEL, Punj Lloyd)
owing to input cost pressures. Further, rising interest cost marred the
sector’s profitability with profit margins dipping 80bps to 6.9%. Order
intake for the sector dipped 17% Y-o-Y to INR 302 bn, courtesy BHEL,
whose order intake took a massive 75% tumble. We remain cautious on
the overall execution pick up in the sector over the next few quarters
owing to the prevailing macro headwinds.
Macro headwinds took a toll on execution
Execution in the sector was decent during Q1FY12, up 14.8% Y-o-Y against our
expectation of 19.0%. Amongst large caps, BHEL, Crompton Greaves, Cummins and ABB
reported dismal set of numbers, much below ours and Street expectations. Project
deferments and client issues took a toll on execution of companies in the power T&D
space. We remain cautious on the overall execution pick up in the sector over the next
few quarters owing to the prevailing macro headwinds.
Rising input costs and interest rates hurt profitability
Over the past few quarters, raw material prices have touched new highs, pressurising
margins. High input costs continued to impact the sector with EBITDA margins sliding
110bps Y-o-Y to 11.2%. Rising interest costs further singed the sector’s profitability,
leading to flat profit growth, lowest in the past three quarters.
Inflationary pressures dent order inflow
Order inflow was sluggish, primarily due to an overall slowdown owing to inflationary
pressures apart from various other issues such as environmental clearance, coal linkage
issues, among others, which led to project deferrals. Order intake for the sector
declined 17% Y-o-Y to INR 302 bn, courtesy BHEL, whose order intake took a massive
75% tumble.
Outlook: Cautious; stay selective
Q1FY12 was tepid in terms of ordering momentum owing to limited tender awards in
power and infrastructure (ex roads) in the country and do not expect any major pick up
in Q2FY12 as well; we expect ordering momentum to pick up pace only in H2FY12. Also,
we expect H2FY12 to see higher interest cost and input cost impact eating into the
sector’s profitability, those some respite is likely from declining input cost as low cost
inventory is utilised. In our view, pricing pressure is likely to continue in the T&D space
and also expect heightened competition in the BTG space. Hence, we prefer diversified
entities like L&T and Siemens in the large-cap space.
Top Picks: L&T, Havells, KEC International, Siemens
Q1FY12 results threw up major negative surprises
• Crompton Greaves (CG) delivered a big negative surprise with loss in its overseas
power systems division and a sharp dip in domestic EBIT margin. Management
slashed FY12 blended EBIDTA guidance drastically to just about 8-10% from 13-14%.
• BHEL’s Q1FY12 sales were way below our expectation largely owing to issues at
Mumbai port (due to which components’ import was delayed), which impacted the
company’s plant commissioning during the quarter; this resulted in a mere 8% Y-o-Y
revenue growth. Also, lack of overall awards in the power sector led to BHEL’s order
intake dipping a massive 75% Y-o-Y to INR 24.7 bn.
• Bajaj Electricals’ (BJE) Q1FY12 numbers were below our and consensus estimates.
While revenue for the quarter grew 13%, earnings dipped 51% as the company
incurred expenses on closure of several old/stuck projects to free up working capital
and bring in more efficiency in employee costs.
SECTOR SNAPSHOT
Sector: BTG (BHEL, Thermax, BGR Energy)
• Management commentary: Maintaining aggressive order intake guidance for FY12.
• Order intake: While Industry orders for Thermax were better than expectation,
utility orders posted a sharp dip.
• Execution: Much below expectation, except for Thermax; sector likely to face
execution challenges in ensuing quarters.
• Margins: H1FY12 to remain under pressure; H2FY12 should see some improvement
in margins as input costs decline.
• Key trigger: BTG tender awards expected in 3-5 months/ import duty imposition.
Sector: T&D equipment (Siemens, ABB, Crompton)
• Management commentary: Industry overcapacity and foreign competition to keep
pricing under pressure.
• Order intake: The power segment including CRG witnessed muted ordering owing to
limited tendering in the sector.
• Execution: Continued deferments impacted execution growth.
• Margins: Margin recovery unlikely owing to intense competition.
• Key trigger: Sharp uptick in T&D project awards.
Sector: T&D EPC (KEC, JSL, KPTL)
• Management commentary: Execution not in tandem with order intake momentum.
• Order intake: T&D EPC market expected to grow at 10-15% in FY12E with most
tenders being back ended. Export market has seen decent momentum in Q1FY12.
• Execution: In line with expectations; momentum likely to continue.
• Margins: Although margins were well guarded, profitability was hit on account of
rising interest cost.
• Key trigger: Pick up in execution and continued ordering momentum in key markets
including US, MENA, etc.
Sector: Diversified Infra (L&T, Voltas, Punj Llyod)
• Management commentary: Banking on export market incrementally. Cautiously
optimistic outlook in the near to medium term.
• Order intake: In line with expectations except Voltas. L&T likely to get Middle East
boost in order intake.
• Execution: In line with expectations; likely to remain strong owing to a decent
revenue growth visibility, barring Voltas.
• Margins: Marginally below expectations. Profitability could further get impacted
owing to continued interest cost impact and input cost pressures.
• Key trigger: Improving macro scenario like softening of interest rates and overall
pick up in industrial capex, coupled with softening of input cost pressures.
Sector: Consumer durables (Havells, Bajaj Electricals, Crompton, Voltas)
• Management commentary: Slower sales of fans, coolers, air conditioners due to
summer not being harsh, lower construction activities, and interest rate pressures.
• Execution: Below expectations except Havells which recorded strong growth in
international markets. Revenue growth may be a challenge in the near term due to
high inflation and rising interest rates.
• Margins: Below expectations as commodity prices were high. The sector may post
some margin improvement in the near term after softening of commodity prices.
• Key trigger: Launching of new appliances/easing of inflationary pressures.
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