CAPITAL GOODS & POWER :Q4FY12 RESULTS PREVIEW :Kotak Securities PDF link

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http://www.kotaksecurities.com/pdf/dmb/MorningInsight10042012.pdf

CAPITAL GOODS & POWER
Project investment snapshot
 Project investment intentions through fresh proposals declined by a
hefty 62% during the first nine months of 2011-12 on a Y-O-Y basis. According to a project survey, 5,629 new projects were announced during
April-December 2011 envisaging capital outlay of Rs. 2.2 trn as compared
to 7,445 new projects amounting to Rs.5.7 trn in 9M FY11.
 The sharpest drop in investment proposals has been in metals and mining, power and railways. The reasons are not far to seek. Land acquisition and fuel supply issues have stalled investment in Power and Metals/
Mining sector. Investment in rail projects has been affected possibly due
to deterioration in the finances of the Railways.
Preview Highlights
 We expect aggregate revenue growth of 12% YoY in the fourth quarter, driven
mainly by BHEL and L&T.
 Aggregate EBITDA is expected to decline by 4% yoy as we project aggregate
EBITDA margins to contract by 260 bps to 14.4%. The major contribution to
margin decline is attributed to Suzlon. Ex-Suzlon, aggregate EBITDA is projected
to remain flat led by 190 bps decline in EBITDA margin.
 Aggregate PAT is expected to decline 11.4% YoY in Q4 FY12. Excluding Suzlon,
aggregate PAT expected is expected to remain flat.
 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.
 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 Cummins, Voltas and Engineers India Ltd.
Stock Performance
The capital goods sector remained outperformer (21 % gain vs 12% for the Sensex)
for the quarter as the sector rebounded strongly after having beaten down in CY11.
Attractive valuations, pause in monetary tightening by the RBI and expectations of
government reforms were the prime reasons for outperformance.
Commodity prices firmed up in Q4FY12
During the quarter, average price of HR steel coils was up 8.1% qoq to USD 714 per
ton, which would increase cost pressures for Capital Goods companies.
Average price of copper which is the prime raw material for electrical equipment
has increased 10% qoq in the quarter. The effect of this would be in terms of higher
revenues but downside in EBITDA margins.
Forex Scenario - MTM relief likely for EKC, Time Technoplast and
Blue Star
Rupee has appreciated 6% vs the USD during the quarter. Positive for Everest
Kanto, Time Technoplast, Blue Star and Voltas as these companies are net importers.