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Capital Goods
ƒ Consistent macro headwinds lead to chronic order inflows lull
Stalled policy decision making from the government machinery,
stubborn inflation & rising borrowing costs and various macro issues
plaguing the power sector (issues relating to fuel linkages, poor SEB’s
financials and other regulatory hurdles) have significantly de-rated the
capex cycle in Q2FY12. Above this, the RBI has raised the policy rates
by 350 bps on 12 counts. All these variables have led to a chronic
shortage of order inflows for the capital goods industry. For the I-direct
capital goods coverage universe, order inflows were at | 2000 crore
(announced on the stock exchanges). The only silver lining for
equipment manufacturers was the declaration of L1s in the 9X800 MW
NTPC bulk tender. The outcome was surprising as new players did
surprise the incumbents as tenders revealed good degree of pricing
pressure and competitive intensity present in the power equipment
space. On the T&D side, PowerGrid has announced orders worth ~|
3500 crore in Q2FY12 vs. | 2100 crore in Q2FY11.
ƒ High working capital requirement and high interest cost to play out
We expect the companies to manage high single digit growth in
revenues of 9% for the coverage universe. The same is not reflected in
PAT growth and margins. The primary reason for the same is the steep
rise in interest rates and huge rise in working capital requirements as
most of the companies under our coverage are facing project delays
and have reasonable exposure to government agencies. This naturally
strains the working capital cycle, especially during periods of
moderation. In some cases, we expect the interest costs to double on a
YoY basis. Hence, revenue and execution pace are overshadowed. For
instance, KEC is expected to report 25% YoY growth in revenues but
PAT is expected to grow 3.2% YoY as interest cost is expected to rise
by 2x YoY.
ƒ Transmission EPC companies better placed than others in Q2FY12
Robust order flows in FY11 and Q1FY12 will ensure good execution
growth for the transmission EPC companies. KEC and Jyoti Structures
are expected to report 25% YoY ands 23%YoY growth in revenues. In
contrast, PAT for the above companies are expected to grow 3% and
15% YoY on account of higher interests outgo and tight working capital
cycle, respectively. On the industrial and power generation equipment
side, we expect Thermax to report 14% YoY growth. However, at the
same time, dismal order flows in H1FY12 will pose visibility challenges
ahead. On the flip side, BGR and Hindustan Dorr are expected to post a
weak set of results.
Company specific view
Company Remarks
BGR Energy We expect a decline of 16% YoY and 28% YoY in revenues and PAT in Q2FY12E on the
back of weak order inflows during FY11 and H1FY12. EBITDA margins at 11.6% will
remain stable as higher share of BoP revenues are expected to be booked. The only
silver lining during Q2FY12 for BGR was L1 in 9X800 MW NTPC bulk tender for
turbines
Hindustan Dorr We expect weak execution for the company to continue as we have modelled in 15%
YoY decline in Q2FY12 revenues. Margins are expected to remain muted on a YoY
basis at 9.4%. Consequently, coupled with higher interest rates and increased
working capital requirements, we expect PAT de-growth of 71% YoY
Thermax Dismal order wins will be a key concern for Thermax in Q2FY12 as it will impact
revenue visibility, going ahead. However, Q2FY12 will see revenues growing by 14%
YoY. This will mainly be led by the 13% YoY growth in energy segment. We have built
in ~4% YoY growth in Q2FY12 PAT
Jyoti Structures Order inflows have been reasonable as the company has won orders worth | 766
crore (announced on the exchanges), implying growth of 11% YoY. Similarly, revenues
are expected to grow 16% YoY. Skewed domestic backlog will ensure steady margins
at 11.4%. High interest costs in Q2FY12 will lead to PAT grow of 16% YoY
Sterlite
Technologies
We expect a 12% YoY jump in revenues (growth in conductor volume assumption at
15% YoY). EBITDA margins are expected to decline 910 bps YoY to 8.6% in Q2FY12E,
on the back of execution of low margin orders in the power segment. Consequently,
PAT is expected to de-grow by 66% YoY in Q2FY12
KEC International We expect consolidated revenues to rise by 25% YoY. The company has won
significant orders in FY11 from domestic as well as international markets, rendering
high visibility. EBITDA margins are expected at 9.6% on the back of high international
fixed price orders. PAT is expected to grow by 4% YoY
Kalpataru Power Order inflows were muted during Q2FY12. However, we believe KPTL will report 13%
YoY revenue growth. EBITDA margins are expected to remain flat at 11.2%. Similarly,
we expect a flattish growth in PAT at | 40 crore in Q2FY12
Source: Company, ICICIdirect.com Research
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