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CAPITAL GOODS & POWER
The capital goods index has continued to lose momentum into the third
quarter of FY12. Few pointers.
q IIP for October 2011 reported a contraction of 5.1%. The performance of
capital goods index was even worse.
q Project investment intentions through fresh proposals declined by a
hefty 62% during the first half of 2011-12 on a Y-O-Y basis. According to
a project survey, 3,858 new projects were announced during April-September
2011 envisaging capital outlay of Rs.1.3 trn as compared to 4930
new projects amounting to Rs.3.5 trn in H1 FY11.
q More worryingly, big ticket projects in crucial sectors like Electricity and
Metals & Minerals, have taken a big hit. Apparently, worsening investment
climate, including consistent hikes in policy rates by the RBI
coupled with fuel supply bottlenecks, policy stalemate has contributed
to the deceleration in project activity.
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.
Preview Highlights
n We expect aggregate revenue growth of 14% YoY in the third quarter, driven
mainly by BHEL and L&T.
n Aggregate EBITDA is expected to grow at a lower pace of 7% yoy as we project
aggregate EBITDA margins to contract by 70 bps to 12.7%. Aggregate PAT is
expected to grow 11.6% YoY in Q3 FY12.
n We remain cautious on projects-based companies given the negative outlook on
capex cycle and a deteriorating working capital cycle. Interest expenses are seen
spiraling up in this quarter as well.
n While valuations are now reasonable from a historical perspective, we note that
the sector remains vulnerable to earnings downgrades. Remain selective in our
stock picks with preference for product-oriented companies over project-oriented
ones. Prefer Havells India, Greaves Cotton, Bharat Electronics.
Stock Performance
The capital goods sector remained 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.
Commodity prices soften in Q3FY12 but benefits to be partly offset
by depreciation in rupee.
During the quarter, average price of HR steel coils was up 4.5% yoy to USD 706 per
ton. However on a sequential basis, HR coil prices have eased by 10% qoq. 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 declined 14% yoy in the quarter. The effect of this would be in terms of lower
revenues but upside in EBITDA margins coupled with reduced inventory holding cost.
Forex Scenario - MTM hit likely for EKC, Time Technoplast and
Blue Star
Rupee has depreciated 8.8% and 3.4% vs the USD and Euro respectively during the
quarter. Negative for Everest Kanto, Time Technoplast, 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 ABB: The power transformer sector is going through a prolonged phase of margin
pressure as players have been undercutting prices to utilize their capacity.
However, there has been some easing in price undercutting off late, we understand.
Copper prices have corrected in the quarter but the decline in rupee
would have partly offset the gains. The company has during the quarter booked
a major HVDC transmission link order.
n Areva: Post demerger of transmission and distribution business into separate entities,
the company could be reporting Q4CY11 numbers for transmission business.
Hence numbers are not comparable.
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. While announcing the Q2FY12 numbers, the company had
lowered its guidance for order intake from 15-20% to 5%. In recent weeks, the
top management while highlighting the depressed market conditions had hinted
at a possibility of missing out on the revised guidance. The management also
shared its FY13 outlook and guided for flat order intake.
n Hind Dorr Oliver: We project 86% yoy decline in profits primarily due to decline
in revenues and higher interest costs. 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 Q2 FY12. However,
given the decline in order backlog, revenue growth in the remaining quarters of
the fiscal would take a hit, we opine.
n Voltas: The company's Q2 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. Due to the depressed profitability in its various business
segments, 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.
n Greaves Cotton: 3W sales volumes of GCL's client grew at a moderate pace of
6% yoy in Oct-Nov 2011 period. The slowdown has been exacerbated by Piaggio
(volumes down 5% yoy in Oct-Nov 2011). Tata Motors has an exclusive sourcing
arrangement with GCL for single cylinder diesel engine to be fitted for its Magic
Iris/Ace Zip LCV models in the 0.6 ton range. Supplies have started meaningfully
since the month of September.
The company indicated that initial feedback for this vehicle has been good and
volumes are going up progressively. The company is currently clocking volumes
of 6000 per month and expects to deliver 30000-35000 units in the 2H FY12.
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. A positive is that the company has also won an order for EHV
cables, which we believe is a major breakthrough for the company.
n Everest Kanto: The offtake from Iran (EKC's most profitable market) continues
to remain adversely affected due to geopolitical developments. This coupled with
depreciation in Rupee has resulted in MTM hit on foreign borrowings. The company
is expected to report MTM loss in Q3 FY12 results as well due to the depreciation
in Rupee.
n Time Technoplast: The company had to take forex loss of Rs 70 mn in Q2 FY12
due to depreciation in Rupee. Since the rupee has depreciated further by 8% in
the quarter, the company would have to take a further hit in Q3 numbers. However,
the quantum of MTM hit is likely to be lower than in Q2 FY12. Profitability
is likely to remain in pressure as the company is incurring higher overheads related
to commissioning of manufacturing units in india and abroad. Rise in HDPE
prices and higher interest outgo would also 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 muted earnings growth 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 11% revenue growth for Siemens as the company has reported
adequate increase in order book in FY11. Margins are likely to come
down 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 Q3FY12 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 consumer appliances business in Q3 FY12.Engineering and project business is
likely to remain under pressure.
n AIA is expected to report growth in revenues as well as profits in Q3FY12. This
would mainly be on account of continued up tick in new market creation in mining
space.
n Gujarat Apollo Ltd: GAL is expected to report YoY growth in Q3FY12. NHAI
awarded record orders in Q4FY11 and Q1FY12 which are likely to create demand
in 2HYFY12.
n Tractors India Limited (TIL): TIL is expected to report growth in sales for the
quarter. We believe that the sluggish infrastructure spending and rising interest
rate scenario pose a negative impact on company's growth.
n Havells India Ltd (HIL): HIL is likely to report meaningful YoY growth in net
profits. Sylvania restructuring should progress in positive direction and is expected
to aid to operating margins. Domestic business is likely to report meaningful
growth on account of robust demand from tier II and tier III cities.
Power
n NTPC: Commercial generation in Q3 FY12 is likely to remain flat on a yoy basis.
During the quarter, the company commissioned 500 MW and 660 MW each at
Jhajjar and Sipat.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CAPITAL GOODS & POWER
The capital goods index has continued to lose momentum into the third
quarter of FY12. Few pointers.
q IIP for October 2011 reported a contraction of 5.1%. The performance of
capital goods index was even worse.
q Project investment intentions through fresh proposals declined by a
hefty 62% during the first half of 2011-12 on a Y-O-Y basis. According to
a project survey, 3,858 new projects were announced during April-September
2011 envisaging capital outlay of Rs.1.3 trn as compared to 4930
new projects amounting to Rs.3.5 trn in H1 FY11.
q More worryingly, big ticket projects in crucial sectors like Electricity and
Metals & Minerals, have taken a big hit. Apparently, worsening investment
climate, including consistent hikes in policy rates by the RBI
coupled with fuel supply bottlenecks, policy stalemate has contributed
to the deceleration in project activity.
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.
Preview Highlights
n We expect aggregate revenue growth of 14% YoY in the third quarter, driven
mainly by BHEL and L&T.
n Aggregate EBITDA is expected to grow at a lower pace of 7% yoy as we project
aggregate EBITDA margins to contract by 70 bps to 12.7%. Aggregate PAT is
expected to grow 11.6% YoY in Q3 FY12.
n We remain cautious on projects-based companies given the negative outlook on
capex cycle and a deteriorating working capital cycle. Interest expenses are seen
spiraling up in this quarter as well.
n While valuations are now reasonable from a historical perspective, we note that
the sector remains vulnerable to earnings downgrades. Remain selective in our
stock picks with preference for product-oriented companies over project-oriented
ones. Prefer Havells India, Greaves Cotton, Bharat Electronics.
Stock Performance
The capital goods sector remained 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.
Commodity prices soften in Q3FY12 but benefits to be partly offset
by depreciation in rupee.
During the quarter, average price of HR steel coils was up 4.5% yoy to USD 706 per
ton. However on a sequential basis, HR coil prices have eased by 10% qoq. 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 declined 14% yoy in the quarter. The effect of this would be in terms of lower
revenues but upside in EBITDA margins coupled with reduced inventory holding cost.
Forex Scenario - MTM hit likely for EKC, Time Technoplast and
Blue Star
Rupee has depreciated 8.8% and 3.4% vs the USD and Euro respectively during the
quarter. Negative for Everest Kanto, Time Technoplast, 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 ABB: The power transformer sector is going through a prolonged phase of margin
pressure as players have been undercutting prices to utilize their capacity.
However, there has been some easing in price undercutting off late, we understand.
Copper prices have corrected in the quarter but the decline in rupee
would have partly offset the gains. The company has during the quarter booked
a major HVDC transmission link order.
n Areva: Post demerger of transmission and distribution business into separate entities,
the company could be reporting Q4CY11 numbers for transmission business.
Hence numbers are not comparable.
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. While announcing the Q2FY12 numbers, the company had
lowered its guidance for order intake from 15-20% to 5%. In recent weeks, the
top management while highlighting the depressed market conditions had hinted
at a possibility of missing out on the revised guidance. The management also
shared its FY13 outlook and guided for flat order intake.
n Hind Dorr Oliver: We project 86% yoy decline in profits primarily due to decline
in revenues and higher interest costs. 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 Q2 FY12. However,
given the decline in order backlog, revenue growth in the remaining quarters of
the fiscal would take a hit, we opine.
n Voltas: The company's Q2 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. Due to the depressed profitability in its various business
segments, 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.
n Greaves Cotton: 3W sales volumes of GCL's client grew at a moderate pace of
6% yoy in Oct-Nov 2011 period. The slowdown has been exacerbated by Piaggio
(volumes down 5% yoy in Oct-Nov 2011). Tata Motors has an exclusive sourcing
arrangement with GCL for single cylinder diesel engine to be fitted for its Magic
Iris/Ace Zip LCV models in the 0.6 ton range. Supplies have started meaningfully
since the month of September.
The company indicated that initial feedback for this vehicle has been good and
volumes are going up progressively. The company is currently clocking volumes
of 6000 per month and expects to deliver 30000-35000 units in the 2H FY12.
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. A positive is that the company has also won an order for EHV
cables, which we believe is a major breakthrough for the company.
n Everest Kanto: The offtake from Iran (EKC's most profitable market) continues
to remain adversely affected due to geopolitical developments. This coupled with
depreciation in Rupee has resulted in MTM hit on foreign borrowings. The company
is expected to report MTM loss in Q3 FY12 results as well due to the depreciation
in Rupee.
n Time Technoplast: The company had to take forex loss of Rs 70 mn in Q2 FY12
due to depreciation in Rupee. Since the rupee has depreciated further by 8% in
the quarter, the company would have to take a further hit in Q3 numbers. However,
the quantum of MTM hit is likely to be lower than in Q2 FY12. Profitability
is likely to remain in pressure as the company is incurring higher overheads related
to commissioning of manufacturing units in india and abroad. Rise in HDPE
prices and higher interest outgo would also 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 muted earnings growth 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 11% revenue growth for Siemens as the company has reported
adequate increase in order book in FY11. Margins are likely to come
down 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 Q3FY12 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 consumer appliances business in Q3 FY12.Engineering and project business is
likely to remain under pressure.
n AIA is expected to report growth in revenues as well as profits in Q3FY12. This
would mainly be on account of continued up tick in new market creation in mining
space.
n Gujarat Apollo Ltd: GAL is expected to report YoY growth in Q3FY12. NHAI
awarded record orders in Q4FY11 and Q1FY12 which are likely to create demand
in 2HYFY12.
n Tractors India Limited (TIL): TIL is expected to report growth in sales for the
quarter. We believe that the sluggish infrastructure spending and rising interest
rate scenario pose a negative impact on company's growth.
n Havells India Ltd (HIL): HIL is likely to report meaningful YoY growth in net
profits. Sylvania restructuring should progress in positive direction and is expected
to aid to operating margins. Domestic business is likely to report meaningful
growth on account of robust demand from tier II and tier III cities.
Power
n NTPC: Commercial generation in Q3 FY12 is likely to remain flat on a yoy basis.
During the quarter, the company commissioned 500 MW and 660 MW each at
Jhajjar and Sipat.
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