Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Capital Goods
Given the weak order inflows over the past several quarters, we expect
only a moderate 8% YoY revenue growth during 3QFY12. The higher raw
material cost (higher input costs and pricing pressure due to intense
competition) will lead to a 1% YoY decline in EBITDA. In addition, the
higher cost of credit (both long and short term debt) will likely lead to a
higher 13% YoY decline in PAT in the quarter.
Order inflows continue to be lackluster: Given the challenging macro
environment (rate hikes, political policy paralysis, global economic crisis) and with
structural headwinds in the power sector (project delays, fuel supply uncertainty,
health of state electricity boards etc.), order inflows for the entire Capital Goods
sector would continue to remain elusive. Industrial capex too continues to be dull
given the slowing economy (index of industrial production growth has slowed to
3.6% YTD compared with 8.3% in FY2011) and high interest rates. Lastly,
increasing competitive intensity has meant that high equipment prices have
dropped to the 2009 level (corrected by ~15% in the last six to eight months) as
players across the board are desperate for orders.
Preparing for upcoming results
Heading into the results season, we revisit our assumptions across the coverage
universe and consequently downgrade earnings to the tune of 5%-10% for BHEL
and Crompton Greaves, 20%-30% for Thermax and BGR Energy and now expect
Suzlon to report losses during FY12 as against our earlier estimate of profits. We
maintain our estimates for Cummins and Greaves Cotton.
We also maintain our BUY stance on Cummins India, Greaves Cotton and Suzlon
Energy and our SELL stance on BHEL, Thermax, Crompton Greaves and BGR
Energy.
Ambit v/s consensus
On FY12 consolidated basis, whilst we are broadly in line with consensus for
Thermax and Greaves Cotton, our estimates for BHEL, Cummins and BGR Energy
are below consensus, as we factor in lower order inflows and slower execution.
Recommendation
Compared with boiler and turbine (BTG) manufacturers, we find diesel engines a
better way to play the currently depressed Capital Goods cycle. Unlike BTG
companies that are facing structural challenges, engine companies are victims of
cyclicality. Hence their fortunes should turn with an uptick in corporate capex. Our
top picks in the sector are Cummins and Greaves Cotton.
Cummins is our most preferred player given its superior presence (70% of its sales)
in the large engine segment. This is backed by superior technology, strong brand
recall and a well-built dealer network. Its numero uno position appears defensible
despite the presence of global players like Volvo, GE, Mitsubishi, and Caterpillar.
Greaves Cotton is the largest domestic manufacturer of light diesel engines for the
three wheeler automotive industry. Greaves enjoys an enviable position in the
three wheeler engine market thanks to its exclusive tie-up with Piaggio and M&M
(together control 36% market share in three wheeler segment).
Thermax (TMX IN, mcap US$0.9bn SELL, TP `429, 3% upside)
Why are we revising our estimates? In the 2QFY12 results, order inflows
declined 13% YoY (compared with our FY12 assumption of a 5% decline) and the
working capital cycle turned positive to `453mn versus our assumption of negative
3% of sales for FY2012). Post results, we had placed our target price of `553
Under Review whilst maintaining our SELL stance (given the macro challenges in its
core captive power business alongside structural headwinds in the boiler segment).
Considering the dismal 2QFY12 results, continued lack of orders and delayed
payments, we cut our order intake assumption for FY2012 to -15% and for FY2013
to 10% from the earlier figures of -5% and 15% respectively. Further, we assume
higher pressure on working capital and now model working capital investment of
0% of sales in FY2012 and 1% in FY2013 from the previous figures of -3% and -
1% of sales respectively.
However, to factor in better-than-expected execution in 1HFY12, we marginally
increase our topline estimates for FY12 by 3%; whilst our FY12 EPS estimate for
gets revised by 2% to `34.6, our FY13 EPS reduces by 18% to `32.3.
Consequently, our target price now stands reduced to `429.
Valuation: Based on our DCF model (assuming WACC of 13.5% and a terminal
growth rate of 4%), we value Thermax at `429 implying FY12 and FY13 P/E of
12.4x and 13.3x respectively. On a relative basis, Thermax trades at a ~25%-35%
premium to its sectoral peers, which we believe is unjustified given the
deteriorating business environment (slowing economy and tough competition in
the utility boilers foray). Furthermore, the likely deterioration in its cash flow
profile, as Thermax takes on more EPC jobs, is also likely to result in its current
premium getting eroded. We maintain our SELL recommendation on the stock.
BGR Energy (BGRL IN, mcap US$0.3bn, SELL, TP `193, 3% downside)
Why are we revising our estimates? Disappointing order intake of a mere
~`22.7bn during 9MFY12 (v/s our FY12 order inflow assumption of `125bn) has
meant that BGR’s order book (derived backwards) at the end of 9MFY12 now
stands reduced at ~`78.5bn (down 16% YoY). Besides, with land
acquisition/clearances and issues now holding up:
(i) award of the much-awaited NTPC second bulk tender (wherein BGR emerged as
the L1 player and was likely to win the award of 4*800mW turbine sets worth
~`28bn in 3QFY12), and the
(ii) ever elusive Rajasthan EPC order worth ~`60bn; we are cutting our FY2012
and FY2013 order intake assumptions to `25bn and `113bn respectively (from
`125bn and `87bn earlier) as we now expect these orders to be booked during
FY13.
Further, given the sharp spurt in the working capital at the end of 2QFY12 results
(net working capital excluding cash at `24bn for BGR at the end of 1HFY12
jumped 78% YoY v/s 26% YoY decline in the sales, on the back of a sharp 36%
increase in the debtors) and a continued system-wide pressure in realization of
payments from customers, we assume higher pressure on working capital (we now
model working capital cycle of 110 days v/s our earlier estimate of 97 days). As a
result our EPS estimates for FY2012 and FY2013 gets reduced by 12% and 30% to
`38.1 and `29.7 respectively and consequently our target price stands reduced to
`193.
Valuation: We continue to maintain our negative outlook for the entire BTG
manufacturing space including BGR, given that a) over 95% of the BTG orders for
the XII Five Year Plan (FY13-FY17) having already been placed, b) the freeze in
India for new power plant capex (40gW of operating and upcoming capacity
already impacted on the back of the fuel crisis and elusive clearances) and c)
demand-supply mismatch (planned BTG capacity of 35+ gW coming on stream
from local manufacturers alongside the continued influx of Chinese equipment, in
a 20gW per annum market).
Based on our DCF model (assuming WACC of 13% and a terminal growth rate of
3%), we value BGR at `193 implying FY12 and FY13 P/E of 5.1x and 6.5x
respectively. On a relative basis, BGR trades at a ~40% discount to its peers,
which we believe is justified given BGR’s poor growth prospects over FY11-13 (PAT
de-growth of 19% v/s 6% growth for peers) and inferior return ratios (17% ROE v/s
23% for peers). We maintain our SELL recommendation on the stock.
Suzlon (SUEL IN, mcap US$0.6bn, BUY, TP `40, 110% upside)
Why are we revising our estimates? Rising competition from new players like
Vestas, GE and Gamesa in particular and the depleting land bank has meant that
Suzlon's India market share has dropped to ~40% compared to an average of
50% in the last two years. Since the introduction of generation based incentives
(GBI) and launch of renewable energy certificates (REC) a lot of independent
power producers (IPPs) have started installing wind farms as the IR` post these
announcements have increased to at least ~21% compared to ~19% earlier.
To factor this in we are downgrading our FY2012 and FY2013 market share
assumptions to 40% and 45% from the earlier 60% and 50% respectively. We are
assuming a higher market share in FY2013 compared with FY2012, as Suzlon has
started investing money in building up the land bank in anticipation of likely 40%
growth in Indian's wind installations in CY2012. Consequent to the downgrade,
our consolidated revenues and EBITDA stand reduced by 8% and 27% in FY2012
and 7% and 23% in FY2013 respectively.
Valuation and recommendation: Whilst we lower our Suzlon Wind’s valuation
to `10 per share (from earlier `27 per share), we continue to maintain our BUY
recommendation, as we believe that Suzlon’s strong execution in 2HFY12 and
1HFY13 and receipt of US$202mn from Edison will help it honour its FCCB
obligation in June 2012 and October 2012 (a key concern on the stock). Note that
the yield on Suzlon’s FCCBs maturing in June 2012 and October 2012 is 40%+.
Adding `30/share for the Suzlon’s stake in RePower takes our SOTP to `40/share.
Our SOTP implies a P/B of 1x based on FY13 book value, which is lower than the
5-year historical average of 1.5x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Capital Goods
Given the weak order inflows over the past several quarters, we expect
only a moderate 8% YoY revenue growth during 3QFY12. The higher raw
material cost (higher input costs and pricing pressure due to intense
competition) will lead to a 1% YoY decline in EBITDA. In addition, the
higher cost of credit (both long and short term debt) will likely lead to a
higher 13% YoY decline in PAT in the quarter.
Order inflows continue to be lackluster: Given the challenging macro
environment (rate hikes, political policy paralysis, global economic crisis) and with
structural headwinds in the power sector (project delays, fuel supply uncertainty,
health of state electricity boards etc.), order inflows for the entire Capital Goods
sector would continue to remain elusive. Industrial capex too continues to be dull
given the slowing economy (index of industrial production growth has slowed to
3.6% YTD compared with 8.3% in FY2011) and high interest rates. Lastly,
increasing competitive intensity has meant that high equipment prices have
dropped to the 2009 level (corrected by ~15% in the last six to eight months) as
players across the board are desperate for orders.
Preparing for upcoming results
Heading into the results season, we revisit our assumptions across the coverage
universe and consequently downgrade earnings to the tune of 5%-10% for BHEL
and Crompton Greaves, 20%-30% for Thermax and BGR Energy and now expect
Suzlon to report losses during FY12 as against our earlier estimate of profits. We
maintain our estimates for Cummins and Greaves Cotton.
We also maintain our BUY stance on Cummins India, Greaves Cotton and Suzlon
Energy and our SELL stance on BHEL, Thermax, Crompton Greaves and BGR
Energy.
Ambit v/s consensus
On FY12 consolidated basis, whilst we are broadly in line with consensus for
Thermax and Greaves Cotton, our estimates for BHEL, Cummins and BGR Energy
are below consensus, as we factor in lower order inflows and slower execution.
Recommendation
Compared with boiler and turbine (BTG) manufacturers, we find diesel engines a
better way to play the currently depressed Capital Goods cycle. Unlike BTG
companies that are facing structural challenges, engine companies are victims of
cyclicality. Hence their fortunes should turn with an uptick in corporate capex. Our
top picks in the sector are Cummins and Greaves Cotton.
Cummins is our most preferred player given its superior presence (70% of its sales)
in the large engine segment. This is backed by superior technology, strong brand
recall and a well-built dealer network. Its numero uno position appears defensible
despite the presence of global players like Volvo, GE, Mitsubishi, and Caterpillar.
Greaves Cotton is the largest domestic manufacturer of light diesel engines for the
three wheeler automotive industry. Greaves enjoys an enviable position in the
three wheeler engine market thanks to its exclusive tie-up with Piaggio and M&M
(together control 36% market share in three wheeler segment).
Thermax (TMX IN, mcap US$0.9bn SELL, TP `429, 3% upside)
Why are we revising our estimates? In the 2QFY12 results, order inflows
declined 13% YoY (compared with our FY12 assumption of a 5% decline) and the
working capital cycle turned positive to `453mn versus our assumption of negative
3% of sales for FY2012). Post results, we had placed our target price of `553
Under Review whilst maintaining our SELL stance (given the macro challenges in its
core captive power business alongside structural headwinds in the boiler segment).
Considering the dismal 2QFY12 results, continued lack of orders and delayed
payments, we cut our order intake assumption for FY2012 to -15% and for FY2013
to 10% from the earlier figures of -5% and 15% respectively. Further, we assume
higher pressure on working capital and now model working capital investment of
0% of sales in FY2012 and 1% in FY2013 from the previous figures of -3% and -
1% of sales respectively.
However, to factor in better-than-expected execution in 1HFY12, we marginally
increase our topline estimates for FY12 by 3%; whilst our FY12 EPS estimate for
gets revised by 2% to `34.6, our FY13 EPS reduces by 18% to `32.3.
Consequently, our target price now stands reduced to `429.
Valuation: Based on our DCF model (assuming WACC of 13.5% and a terminal
growth rate of 4%), we value Thermax at `429 implying FY12 and FY13 P/E of
12.4x and 13.3x respectively. On a relative basis, Thermax trades at a ~25%-35%
premium to its sectoral peers, which we believe is unjustified given the
deteriorating business environment (slowing economy and tough competition in
the utility boilers foray). Furthermore, the likely deterioration in its cash flow
profile, as Thermax takes on more EPC jobs, is also likely to result in its current
premium getting eroded. We maintain our SELL recommendation on the stock.
BGR Energy (BGRL IN, mcap US$0.3bn, SELL, TP `193, 3% downside)
Why are we revising our estimates? Disappointing order intake of a mere
~`22.7bn during 9MFY12 (v/s our FY12 order inflow assumption of `125bn) has
meant that BGR’s order book (derived backwards) at the end of 9MFY12 now
stands reduced at ~`78.5bn (down 16% YoY). Besides, with land
acquisition/clearances and issues now holding up:
(i) award of the much-awaited NTPC second bulk tender (wherein BGR emerged as
the L1 player and was likely to win the award of 4*800mW turbine sets worth
~`28bn in 3QFY12), and the
(ii) ever elusive Rajasthan EPC order worth ~`60bn; we are cutting our FY2012
and FY2013 order intake assumptions to `25bn and `113bn respectively (from
`125bn and `87bn earlier) as we now expect these orders to be booked during
FY13.
Further, given the sharp spurt in the working capital at the end of 2QFY12 results
(net working capital excluding cash at `24bn for BGR at the end of 1HFY12
jumped 78% YoY v/s 26% YoY decline in the sales, on the back of a sharp 36%
increase in the debtors) and a continued system-wide pressure in realization of
payments from customers, we assume higher pressure on working capital (we now
model working capital cycle of 110 days v/s our earlier estimate of 97 days). As a
result our EPS estimates for FY2012 and FY2013 gets reduced by 12% and 30% to
`38.1 and `29.7 respectively and consequently our target price stands reduced to
`193.
Valuation: We continue to maintain our negative outlook for the entire BTG
manufacturing space including BGR, given that a) over 95% of the BTG orders for
the XII Five Year Plan (FY13-FY17) having already been placed, b) the freeze in
India for new power plant capex (40gW of operating and upcoming capacity
already impacted on the back of the fuel crisis and elusive clearances) and c)
demand-supply mismatch (planned BTG capacity of 35+ gW coming on stream
from local manufacturers alongside the continued influx of Chinese equipment, in
a 20gW per annum market).
Based on our DCF model (assuming WACC of 13% and a terminal growth rate of
3%), we value BGR at `193 implying FY12 and FY13 P/E of 5.1x and 6.5x
respectively. On a relative basis, BGR trades at a ~40% discount to its peers,
which we believe is justified given BGR’s poor growth prospects over FY11-13 (PAT
de-growth of 19% v/s 6% growth for peers) and inferior return ratios (17% ROE v/s
23% for peers). We maintain our SELL recommendation on the stock.
Suzlon (SUEL IN, mcap US$0.6bn, BUY, TP `40, 110% upside)
Why are we revising our estimates? Rising competition from new players like
Vestas, GE and Gamesa in particular and the depleting land bank has meant that
Suzlon's India market share has dropped to ~40% compared to an average of
50% in the last two years. Since the introduction of generation based incentives
(GBI) and launch of renewable energy certificates (REC) a lot of independent
power producers (IPPs) have started installing wind farms as the IR` post these
announcements have increased to at least ~21% compared to ~19% earlier.
To factor this in we are downgrading our FY2012 and FY2013 market share
assumptions to 40% and 45% from the earlier 60% and 50% respectively. We are
assuming a higher market share in FY2013 compared with FY2012, as Suzlon has
started investing money in building up the land bank in anticipation of likely 40%
growth in Indian's wind installations in CY2012. Consequent to the downgrade,
our consolidated revenues and EBITDA stand reduced by 8% and 27% in FY2012
and 7% and 23% in FY2013 respectively.
Valuation and recommendation: Whilst we lower our Suzlon Wind’s valuation
to `10 per share (from earlier `27 per share), we continue to maintain our BUY
recommendation, as we believe that Suzlon’s strong execution in 2HFY12 and
1HFY13 and receipt of US$202mn from Edison will help it honour its FCCB
obligation in June 2012 and October 2012 (a key concern on the stock). Note that
the yield on Suzlon’s FCCBs maturing in June 2012 and October 2012 is 40%+.
Adding `30/share for the Suzlon’s stake in RePower takes our SOTP to `40/share.
Our SOTP implies a P/B of 1x based on FY13 book value, which is lower than the
5-year historical average of 1.5x.
No comments:
Post a Comment