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CAPITAL GOODS & POWER
The capital goods sector has continued to lose momentum into the second
quarter of FY12. Few pointers:
q For July 2011, capital goods index posted a muted growth of 3.3% YoY
and we expect to see moderation in the following months as well the
underlying investment trend is weak. Consumer durables grew at 8.6%
YoY in July 2011.
q The cost of projects which were sanctioned institutional assistance during
2010-11 aggregated Rs 4.6 trn, which is only marginally higher than
Rs 4.5 trn envisaged in 2009-10.
q In all likelihood, capital expenditure in 2011-12 is likely to be lower than
the previous year. (Source RBI)
q Fresh investments announced declined 45% YoY during the first five
months of the current fiscal. As against Rs 1.78 trn announced during
April-Aug 2010 period, only Rs 0.98 trn worth of projects were announced
during the corresponding period of the current fiscal, confirming
that the slowdown is indeed there in project investments. The decline
has also been witnessed in terms of number of projects announced.
q Major capital goods players have pointed out that apart from the policy
related bottlenecks, higher interest rates are resulting in longer project
finalisation 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 14% YoY in the second quarter, driven
mainly by BHEL, L&T, ABB, Siemens and Suzlon.
n Aggregate EBITDA is expected to grow at a rate of 14.6% yoy mainly driven by
BHEL, L&T and ABB.
n Aggregate PAT is expected to grow 19% YoY in Q2 FY12.
n By and large, we remain cautious on the capital goods sector in the near-term.
We reckon that valuations are now attractive from a historical perspective. However,
we note that the sector remains vulnerable to earnings downgrades. Remain
selective in our stock picks. Prefer Havells India, Voltas, Greaves Cotton,
Bharat Electronics and Bajaj Electricals.
Stock Performance
The capital goods sector remained an underperformer for the quarter. Weak order
intake and elevated material prices were among the major concerns, which led to
the derating of sector. Sector heavyweights, L&T and BHEL lost a chunk of their
value in the quarter. Voltas and Blue Star suffered derating post their disappointing
Q1 FY12 numbers.
Material price scenario
Material prices remain at elevated levels despite recent easing in prices
During the quarter, average price of HR steel coils was up 17% yoy to USD 785 per
ton. However on a sequential basis, HR coil prices have eased albeit marginally. If
the trend in easing of commodity prices continues, then it could come as a respite
for equipment manufacturers.
Average price of copper which is the prime raw material for electrical equipment
has increased 27% 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.
There has been a correction in copper prices in recent weeks, which if sustained
could provide some relief to transformer manufacturers.
Forex Scenario
Rupee has depreciated 2.3% and 0.5% vs the USD and Euro respectively during the
quarter. Negative for Blue Star and Voltas as these companies are net importers.
Positive for CGL given large share of its overseas operations are Euro-denominated.
Stock view
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. Recent awarding of the
bulk tender from NTPC also signifies rising competitive pressure in the power
generation equipment sector. Government divestment of 5% stake also remains
an overhang on the stock.
n ABB: The power transformer sector is going through a prolonged phase of margin
pressure as players have been undercutting prices to utilize their capacity.
Higher copper prices have further added to margin squeeze for equipment
manufacturers. The company ended Q2 CY11 with a flat order backlog. Sharp
jump in forecast profits for Q2 CY11 is mainly due to low base of Q2 CY10.
n Areva: Market for T&D equipment has slowed down in recent years is management
has been indicating that it has been flat for the year and expected to remain
so in the foreseeable future due to excess capacity in the system and deferral
of large power and infrastructure projects. Price competition has been very
severe especially from Korean players. 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 L&T stock has corrected sharply in recent weeks on concerns
related to growth in order intake, rising competition in power and oil and
gas orders, impact of land acquisition/mining policy issues on project execution
and material cost pressures. The company has not won a single BTG order in
YTDFY12. Moreover, a large order of 3x660 MW from JP Karchana won in FY11
remains a non-starter. Given the challenging business environment, the street
remains skeptical of the company's ability to meet its order intake guidance.
n Hind Dorr Oliver: We project 32% yoy decline in revenues primarily due to
sluggish order backlog. The government's increased scrutiny on environment
compliance and uncertainty over mining policy has directly impacted order intake
for the company.
n Thermax: The company reported strong revenue growth in Q1 FY12. However,
given the flat order backlog, revenue growth in the remaining quarters of the
fiscal would take a hit, we opine. Despite the strong numbers in Q1 FY12, the
stock has lost significant market value in the second quarter. Investors remain
concerned on the growth for the capital goods sector.
n Voltas: The company's Q1 FY12 numbers were well below market expectations
as the company's MEP (projects) business reported significant margin loss. Slowdown
in consumer durables added to the pressure. In our recent interaction, the
management has indicated that new projects in the Middle East are coming at
much lower profit margins. Recent depreciation in Rupee may further add to the
cost pressures as the company is a net importer. FY12 would remain a tough
year for voltas, we opine. Additionally, unless there is adequate accretion in order
backlog in H2FY12, the outlook for FY13 would also remain subdued
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. Recently, the company announced that Mr Anil Kumar as
assumed charge in place of Mr A K Datt as the Chairman and MD.
n Greaves Cotton: Volumes of GCL's main client segment grew 9.4% yoy in Apr-
Aug 2011 period but have slowed down further in July-Aug period to 8% yoy.
The greenfield plant at Aurangabad for manufacturing engines for Tata Motors
appears to have missed the earlier target of July 2011(minor negative in our
view). On the positive side, Tata Motors has started advertising for its 0.6 ton
LCV (Magic Iris and Ace zip). The 4W LCV segment has continued to post strong
volumes and we remain optimistic on the success of Magic Iris/Ace Zip. Tata
Motors is sourcing the engine for this vehicle exclusively from Greaves.
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 Everest Kanto: We expect EKC to report strong growth in revenues on the back
of pick up in demand for CNG cylinders in India and Iran. Reduction in losses at
its US and Chinese subsidiary should also be a positive for overall margins.
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. Average HDPE prices (main feedstock) were up 14%
yoy in Q2 FY12 but flat sequentially. Several of the company's manufacturing facilities
(Indian and abroad) are getting commissioned in FY12, which would aid
the growth momentum. However, rising cost of borrowings would dampen profit
growth.
n Suzlon: We expect another set of poor results from Suzlon as the combined impact
of lower uptick 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.
n Crompton Greaves: CGL should report sharp decline in profits in the quarter
mainly due to lack of activity in the power segment. Raw material prices could
have negative impact on the EBITDA margins.
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 slightly
increase compare to the previous quarter.
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 its margin at EBITDA and PAT
levels.
n Kalpataru Power Transmission: KPTL is likely to observe some margin pressure
in Q1FY12 due to increase in raw material prices. Interest charges are also
expected to increase on account of increase in working capital.
n Bajaj Electricals Limited (BAEL): We expect BAEL to report meaningful growth
in revenues in Q2 FY12 aided by robust demand for consumper appliances from
tier II and tier III cities.
Power
n NTPC: Commercial generation in Q2 FY12 is likely to remain flat on a yoy basis.
The company's Ramagundam unit is generating only 1400 MW out of its rated
capacity of 2400 MW due to disruption in coal supplies as a result of the
Telangana agitation. Similarly, its Kahalgaon unit suffers from shortage of coal.
The company's gas based capacity is operating below potential capacity due to
low demand from state distribution utilities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CAPITAL GOODS & POWER
The capital goods sector has continued to lose momentum into the second
quarter of FY12. Few pointers:
q For July 2011, capital goods index posted a muted growth of 3.3% YoY
and we expect to see moderation in the following months as well the
underlying investment trend is weak. Consumer durables grew at 8.6%
YoY in July 2011.
q The cost of projects which were sanctioned institutional assistance during
2010-11 aggregated Rs 4.6 trn, which is only marginally higher than
Rs 4.5 trn envisaged in 2009-10.
q In all likelihood, capital expenditure in 2011-12 is likely to be lower than
the previous year. (Source RBI)
q Fresh investments announced declined 45% YoY during the first five
months of the current fiscal. As against Rs 1.78 trn announced during
April-Aug 2010 period, only Rs 0.98 trn worth of projects were announced
during the corresponding period of the current fiscal, confirming
that the slowdown is indeed there in project investments. The decline
has also been witnessed in terms of number of projects announced.
q Major capital goods players have pointed out that apart from the policy
related bottlenecks, higher interest rates are resulting in longer project
finalisation 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 14% YoY in the second quarter, driven
mainly by BHEL, L&T, ABB, Siemens and Suzlon.
n Aggregate EBITDA is expected to grow at a rate of 14.6% yoy mainly driven by
BHEL, L&T and ABB.
n Aggregate PAT is expected to grow 19% YoY in Q2 FY12.
n By and large, we remain cautious on the capital goods sector in the near-term.
We reckon that valuations are now attractive from a historical perspective. However,
we note that the sector remains vulnerable to earnings downgrades. Remain
selective in our stock picks. Prefer Havells India, Voltas, Greaves Cotton,
Bharat Electronics and Bajaj Electricals.
Stock Performance
The capital goods sector remained an underperformer for the quarter. Weak order
intake and elevated material prices were among the major concerns, which led to
the derating of sector. Sector heavyweights, L&T and BHEL lost a chunk of their
value in the quarter. Voltas and Blue Star suffered derating post their disappointing
Q1 FY12 numbers.
Material price scenario
Material prices remain at elevated levels despite recent easing in prices
During the quarter, average price of HR steel coils was up 17% yoy to USD 785 per
ton. However on a sequential basis, HR coil prices have eased albeit marginally. If
the trend in easing of commodity prices continues, then it could come as a respite
for equipment manufacturers.
Average price of copper which is the prime raw material for electrical equipment
has increased 27% 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.
There has been a correction in copper prices in recent weeks, which if sustained
could provide some relief to transformer manufacturers.
Forex Scenario
Rupee has depreciated 2.3% and 0.5% vs the USD and Euro respectively during the
quarter. Negative for Blue Star and Voltas as these companies are net importers.
Positive for CGL given large share of its overseas operations are Euro-denominated.
Stock view
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. Recent awarding of the
bulk tender from NTPC also signifies rising competitive pressure in the power
generation equipment sector. Government divestment of 5% stake also remains
an overhang on the stock.
n ABB: The power transformer sector is going through a prolonged phase of margin
pressure as players have been undercutting prices to utilize their capacity.
Higher copper prices have further added to margin squeeze for equipment
manufacturers. The company ended Q2 CY11 with a flat order backlog. Sharp
jump in forecast profits for Q2 CY11 is mainly due to low base of Q2 CY10.
n Areva: Market for T&D equipment has slowed down in recent years is management
has been indicating that it has been flat for the year and expected to remain
so in the foreseeable future due to excess capacity in the system and deferral
of large power and infrastructure projects. Price competition has been very
severe especially from Korean players. 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 L&T stock has corrected sharply in recent weeks on concerns
related to growth in order intake, rising competition in power and oil and
gas orders, impact of land acquisition/mining policy issues on project execution
and material cost pressures. The company has not won a single BTG order in
YTDFY12. Moreover, a large order of 3x660 MW from JP Karchana won in FY11
remains a non-starter. Given the challenging business environment, the street
remains skeptical of the company's ability to meet its order intake guidance.
n Hind Dorr Oliver: We project 32% yoy decline in revenues primarily due to
sluggish order backlog. The government's increased scrutiny on environment
compliance and uncertainty over mining policy has directly impacted order intake
for the company.
n Thermax: The company reported strong revenue growth in Q1 FY12. However,
given the flat order backlog, revenue growth in the remaining quarters of the
fiscal would take a hit, we opine. Despite the strong numbers in Q1 FY12, the
stock has lost significant market value in the second quarter. Investors remain
concerned on the growth for the capital goods sector.
n Voltas: The company's Q1 FY12 numbers were well below market expectations
as the company's MEP (projects) business reported significant margin loss. Slowdown
in consumer durables added to the pressure. In our recent interaction, the
management has indicated that new projects in the Middle East are coming at
much lower profit margins. Recent depreciation in Rupee may further add to the
cost pressures as the company is a net importer. FY12 would remain a tough
year for voltas, we opine. Additionally, unless there is adequate accretion in order
backlog in H2FY12, the outlook for FY13 would also remain subdued
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. Recently, the company announced that Mr Anil Kumar as
assumed charge in place of Mr A K Datt as the Chairman and MD.
n Greaves Cotton: Volumes of GCL's main client segment grew 9.4% yoy in Apr-
Aug 2011 period but have slowed down further in July-Aug period to 8% yoy.
The greenfield plant at Aurangabad for manufacturing engines for Tata Motors
appears to have missed the earlier target of July 2011(minor negative in our
view). On the positive side, Tata Motors has started advertising for its 0.6 ton
LCV (Magic Iris and Ace zip). The 4W LCV segment has continued to post strong
volumes and we remain optimistic on the success of Magic Iris/Ace Zip. Tata
Motors is sourcing the engine for this vehicle exclusively from Greaves.
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 Everest Kanto: We expect EKC to report strong growth in revenues on the back
of pick up in demand for CNG cylinders in India and Iran. Reduction in losses at
its US and Chinese subsidiary should also be a positive for overall margins.
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. Average HDPE prices (main feedstock) were up 14%
yoy in Q2 FY12 but flat sequentially. Several of the company's manufacturing facilities
(Indian and abroad) are getting commissioned in FY12, which would aid
the growth momentum. However, rising cost of borrowings would dampen profit
growth.
n Suzlon: We expect another set of poor results from Suzlon as the combined impact
of lower uptick 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.
n Crompton Greaves: CGL should report sharp decline in profits in the quarter
mainly due to lack of activity in the power segment. Raw material prices could
have negative impact on the EBITDA margins.
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 slightly
increase compare to the previous quarter.
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 its margin at EBITDA and PAT
levels.
n Kalpataru Power Transmission: KPTL is likely to observe some margin pressure
in Q1FY12 due to increase in raw material prices. Interest charges are also
expected to increase on account of increase in working capital.
n Bajaj Electricals Limited (BAEL): We expect BAEL to report meaningful growth
in revenues in Q2 FY12 aided by robust demand for consumper appliances from
tier II and tier III cities.
Power
n NTPC: Commercial generation in Q2 FY12 is likely to remain flat on a yoy basis.
The company's Ramagundam unit is generating only 1400 MW out of its rated
capacity of 2400 MW due to disruption in coal supplies as a result of the
Telangana agitation. Similarly, its Kahalgaon unit suffers from shortage of coal.
The company's gas based capacity is operating below potential capacity due to
low demand from state distribution utilities.
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