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Q3FY12 preview: Expect weak growth, lower profitability
We expect Q3FY12 revenue growth to drop to 12% YoY (from 17% in Q2FY12) due
to weak execution and muted demand amidst high interest rates, and hence a higher
cost of capital. Operating/PAT margins are also likely to come off 85/120bps on
lower revenue growth, higher input costs and increased debt servicing expenses. We
also expect a flat bottomline for the quarter YoY. In our view, as interest rates cycle
has peaked out, the current weakness in some of the quality stocks—which are
backed by strong business fundamentals and sustainable return ratios—provides a
good entry point for long-term investors. KKC and CRG remain our top picks.
v Revenue growth to soften on weak execution: We estimate 12% YoY revenue
growth for our coverage universe during Q3FY12, a deceleration of 500bps QoQ. A
high cost of capital led by elevated interest rates is hurting execution in the Projects
business. The Products business is also witnessing softer offtake on muted demand
and deferred capex plans. The impact is likely to be most severe for power
transmission equipment players and contractors that would likely see a sub-10%
revenue growth YoY. On the other hand, power generation equipment and
contractors is expected to post a revenue growth of 13% YoY, led by BHEL’s
growth of 18%YoY.
v Margin erosion likely: We expect EBITDA/PAT margins for our capital goods
universe to contract 85bps/120bps YoY on lower topline growth, high input costs
and increased debt servicing expenses. The impact of INR depreciation would vary
for each company depending on their net export/import position. KKC, a net exporter
(15% of sales), would benefit from a declining Rupee while ABB/SIEM, both net
importers, would feel the pinch of the currency’s depreciation.
v Order inflows for the sector remain sluggish: The only major order inflow of the
quarter was Rs 41bn order for BHEL from Singareni Collieries. While order inflows
from PGCIL have picked up lately, particularly for transformer/conductor packages
and transmission line tower EPC works, higher competitive intensity and entry of
new players has impacted existing players.
v Key developments to watch for: Easing policy rates accompanied by government
policy actions could improve business confidence, in turn driving order flows over
the medium to long term. However, in the short term, key macroeconomic challenges
persist, which could lead to weak order flows and thus impact revenue growth
visibility.
v Our top picks:
a) KKC: Strong business fundamentals led by dominance in a high entry-barrier
business, high market shares and premium positioning across the product value
chain make the company’s return ratios sustainable.
b) CRG: CRG’s poor FY12 performance is already discounted following the steep
correction in its share price. Given its attractive valuations and structurally high
and sustainable ROCEs in most of its business lines, CRG remains one of our
top picks in the capital goods space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Q3FY12 preview: Expect weak growth, lower profitability
We expect Q3FY12 revenue growth to drop to 12% YoY (from 17% in Q2FY12) due
to weak execution and muted demand amidst high interest rates, and hence a higher
cost of capital. Operating/PAT margins are also likely to come off 85/120bps on
lower revenue growth, higher input costs and increased debt servicing expenses. We
also expect a flat bottomline for the quarter YoY. In our view, as interest rates cycle
has peaked out, the current weakness in some of the quality stocks—which are
backed by strong business fundamentals and sustainable return ratios—provides a
good entry point for long-term investors. KKC and CRG remain our top picks.
v Revenue growth to soften on weak execution: We estimate 12% YoY revenue
growth for our coverage universe during Q3FY12, a deceleration of 500bps QoQ. A
high cost of capital led by elevated interest rates is hurting execution in the Projects
business. The Products business is also witnessing softer offtake on muted demand
and deferred capex plans. The impact is likely to be most severe for power
transmission equipment players and contractors that would likely see a sub-10%
revenue growth YoY. On the other hand, power generation equipment and
contractors is expected to post a revenue growth of 13% YoY, led by BHEL’s
growth of 18%YoY.
v Margin erosion likely: We expect EBITDA/PAT margins for our capital goods
universe to contract 85bps/120bps YoY on lower topline growth, high input costs
and increased debt servicing expenses. The impact of INR depreciation would vary
for each company depending on their net export/import position. KKC, a net exporter
(15% of sales), would benefit from a declining Rupee while ABB/SIEM, both net
importers, would feel the pinch of the currency’s depreciation.
v Order inflows for the sector remain sluggish: The only major order inflow of the
quarter was Rs 41bn order for BHEL from Singareni Collieries. While order inflows
from PGCIL have picked up lately, particularly for transformer/conductor packages
and transmission line tower EPC works, higher competitive intensity and entry of
new players has impacted existing players.
v Key developments to watch for: Easing policy rates accompanied by government
policy actions could improve business confidence, in turn driving order flows over
the medium to long term. However, in the short term, key macroeconomic challenges
persist, which could lead to weak order flows and thus impact revenue growth
visibility.
v Our top picks:
a) KKC: Strong business fundamentals led by dominance in a high entry-barrier
business, high market shares and premium positioning across the product value
chain make the company’s return ratios sustainable.
b) CRG: CRG’s poor FY12 performance is already discounted following the steep
correction in its share price. Given its attractive valuations and structurally high
and sustainable ROCEs in most of its business lines, CRG remains one of our
top picks in the capital goods space.
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