Sector Update Engineering & Capital Goods Margins @ Risk ·:: Emkay

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Sector Update

Engineering & Capital Goods Margins @ Risk ·      Concerns on operating  performance persist for the ECG sector given a deteriorating order book, rising competitive intensity and high input costs ·      Believe FY13E EMKAY and consensus operating margin estimates inadequately factor above concerns. Downsides to EMKAY and consensus margins forecasts not ruled out ·      Softening of input prices could act as near term upside catalysts – but restricted to companies with higher exposure to equipments or shorter duration projects ·      Refraining from forecasting trend in input prices – Retain our top picks – L&T, Thermax, Greaves Cotton and Voltas considering top quartile of earnings performance and de-rated valuation Company Operating Margins (%) Earnings / Share (Rs) PER (X times) CMP Rating Target FY11 FY12E FY13E FY12E FY13E FY12E FY13E BHEL 20.6 19.8 18.8 26.4 27.9 10.4 9.8 274 Hold 376 L&T (*) 13.1 12.1 11.7 75.9 89.3 16.8 14.3 1,274 Accumulate 1,603 Cummins India 16.9 14.6 14.9 19.6 22.4 20.9 18.3 409 Hold 388 Thermax 11.0 11.3 10.4 36.3 36.1 13.5 13.6 491 Accumulate 495 Voltas 9.0 5.6 7.6 6.0 8.8 15.3 10.4 92 Accumulate 121 Blue Star 9.2 6.6 8.2 0.6 15.0 274.5 11.3 170 Hold 185 Punj Lloyd 5.1 7.4 7.5 1.4 2.5 34.0 19.2 49 Hold 63 Greaves Cotton 15.6 15.3 15.4 6.9 8.0 12.9 11.2 89 Buy 103 TRF 5.7 7.1 5.7 32.3 27.6 8.1 9.4 260 Hold 282 McNally Bharat 7.4 7.2 7.1 16.5 16.9 6.3 6.2 104 Accumulate 147 Elecon 16.0 14.7 15.3 8.2 8.3 6.8 6.6 55 Hold 61 (*) Note: L&T operating margins above are standalone while its earnings estimates are consolidated