Engineering & Capital Goods - Growth still away; monthly update : Edelweiss, PDF link

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Monthly highlights: What’s inside?

·       Company interactions

·       Key highlights/ news for the companies/ sector

·       Key macro trends

Economy impact: Tepid pace of recover a concern

The industrial growth has bottomed out in October-November, as corroborated by various economic indicators like PMI, auto sales, export growth, etc. We are reluctant to term it a turnaround in business cycle. Currently, the pace of recovery is weak and present dynamics of the economy do not support the strong turnaround in business cycle. While 50bps rate cut by RBI would help, it will be only at the margin, as RBI future guidance was towards the hawkish side.

Industrial pulse: Headwinds persist

Strong traction in T&D, roads fails to impress; competitive forces sustain

There has been a strong traction in T&D and roads projects awards, led by higher project awards by PGCIL and NHAI. Fresh project awards for PGCIL was at INR108bn (up 24% YoY, ex HVDC project) for 4QFY12, while for NHAI it stood at INR150 bn (up 144% YoY). However, weak project awards in BTG, metals, oil & gas etc impacted overall order inflow for the sector. Entities like BHEL, Thermax etc have seen a muted order intake, which is likely to continue, especially in the utilities segment, while others like L&T are resorting to higher proportion of export and infrastructure projects to counter slowdown in power BTG, hydrocarbon, process plants etc.

Infra spending expected to improve as rate reversal starts; policies remain key

After a 400 bps+ hike in interest rate over past two years, RBI cut repo rate by 50bps recently, which will help bring down overall cost of funds and thus benefit capital spending. Also, with further rate cuts likely over the next 12-15 months, overall industrial spending should see some uptick, raising revenue visibility of the industrials space. However, we believe, policy initiatives wrt key issues like coal and iron ore mining and environmental clearance issues would be key to determining extent of recovery in industrial spending.

Outlook: Prefer Crompton, L&T; avoid BHEL, ABB

We continue to prefer diversified players like Crompton Greaves, L&T, and Bajaj Electricals. We reaffirm our belief in their resilient business models that provide excellent opportunity in the overall uptick in the industrial capex. Our outlook for power generation equipment companies remains subdued owing to larger issues over capacity, fuel availability, high cost of funds, clearance issues etc. We recommend avoiding BHEL, ABB in the equipment space.

Engineering & Capital Goods - Growth still away; monthly update

Regards,