Engineering and Capital Goods - Q4FY12 Result Review - In search of growth DNA :: Edelweiss, PDF link

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Key Q4FY12 highlights:

·       Working capital gallops.

·       Colossal order inflow decline.

·       Declining order book raising doubts over revenue visibility.

·       Execution below expectation; non-operating performance boosts bottom line.

Key observations in changing trends:

·       Rising dependence on exports to counter domestic slowdown.

·       BTG space moving from package bidding to EPC.

Plummeting order inflow induces steep rise in working capital

The sector’s net working capital (NWC) continued to deteriorate during the quarter. NWC to sales stood at 26.7% after stabilising between 15% and 20% over FY09-11; it was 21.7% during the subprime crisis (FY08). The sharp surge was predominantly due to declining order inflow and thereby declining advances on orders and poor collection from debtors.

Policy action key to unlock uptick in industrial capex, order intake

The sector’s order inflow plunged a sharp 32% in Q4FY12, and though it was primarily led by BHEL and Larsen & Toubro (L&T), it is rampant across the sector. While BHEL has set a target of 15GW (3GW in FY12) for FY13, L&T has set it at 15-20%. However, in the backdrop of the overall industrial, economic and political scenario, we perceive targets set by these industry leaders as bullish. In our view, overall uptick in the industrial capex cycle and order intake largely hinges on policy action besides demand uptick.

Outlook for next 12 months: Dim revenue visibility

Declining order inflow and order book impart weak revenue visibility. We believe the pain for power equipment companies is here to stay given slower closure of projects. The domestic T&D players have witnessed price stabilization over the past 4-6 months on accounts of currency depreciation (INR depreciation 20% over the last one year). We continue to prefer diversified players like Crompton Greaves (CRG), L&T and Havells India (HAVL) which have, despite the headwinds, managed to grow their books in double digits; it imparts comfort to top line in the near to medium term. Moreover, CRG, L&T and HAVL are all increasing focus on international geographies to counter the domestic slowdown.

Our Top Picks: Crompton Greaves, Larsen & Toubro and Havells India.

Engineering and Capital Goods - Q4FY12 Result Review - In search of growth DNA

Regards,