21 June 2012

Engineering and Capital Goods - Gathering steam; sector update :Edelweiss PDF link


We recently visited several industry players in the T&D space, the Dedicated Freight Corridor Corporation (DFCC), Delhi Metro, among others, to understand the near to medium term growth potential and on-the-ground execution. Based on our interactions and meetings we returned convinced that the over the forthcoming 12-15 months activity in T&D projects led by PGCIL is likely to sustain decent traction. Also, DFCC and Delhi Metro are likely to gather pace, given reasonable milestones attained so far in both projects.

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T&D: PGCIL leads the pack with strong execution, project awards
While generation has lost pace, as is evident in recent project awards, entities in the T&D space including PGCIL remain hopeful of a healthy traction in both project awards and execution on ground over the next one-two years. While PGCIL maintains its overall capex target at INR1,000bn for the Twelfth Plan period (FY13-FY17), including the intra-state and tariff based competitive bidding, actual spending during the Plan period could be substantially higher.
DFC: Reasonable traction visible; phase I project awards on cards
We expect INR180bn-200bn worth of projects award over the next 12-18 months, given reasonable milestones in land acquisition and fund availability. While most of the land for Western and Eastern corridors (Phase I) has been acquired, we expect balance approvals like environmental clearance at select locations to be in place in the coming months. We expect Eastern Corridor to be first off the block with financial bids expected to be called by September 2012 for stage I of the Phase I. Western Corridors ordering process could start once certain environmental clearance are received in the next few months.
Metro rail: Strong traction in Delhi; other metros lag
Delhi Metro (DMRC) phase III with an estimated capex outlay of INR350bn has seen strong traction, wherein almost 45% of civil tenders have been already awarded. We expect INR250bn plus worth of projects award (civil + rolling stock + systems) over the next 12-15 months. Other than DMRC, Jaipur and Kolkata, there has been little or no traction in other metro projects like Ahmedabad, Cochi, Pune, etc.
Outlook: Prefer L&T and Crompton
We reiterate our preference for Larsen & Toubro (BUY/SO) given its diversified presence over industrials and infrastructure space. In the T&D space, we prefer Crompton Greaves (BUY/SO) which offers a reasonable upside from overseas business transformation and improved traction in the consumer business through new launches and improved sourcing arrangements.
Regards,

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