Monthly highlights: What’s inside?
· Q4FY12 earnings qualitative review.
· Management interactions.
· Key highlights from analyst meet / concall.
· Key highlights/ news for companies/ sector.
· Key macro trends.
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Economy impact: Policy action holds key
Incoming data indicates that the investment cycle is showing no signs of pick up. Policy hurdles and excessive monetary tightening are primary reasons for the slump in investments. Given the extent of slowdown (Q4FY12 GDP growth ~5.3%), while monetary easing is expected sooner rather than later, policy action continues to hold the key in regards to investment pick up.
Industrial pulse: Headwinds persist
Slow start to the year for T&D and roads
Strong year-end traction in T&D and road project awards tend to come off at the start of the year. PGCIL awarded only INR2.5bn during April 2012 (a sharp rise on low base). NHAI awards during the same period stood at INR20bn, a 50% dip. Weak order intake (down 32% during Q4FY12) persisted across the sector. Power generation segment intake is expected to remain weak, affecting BHEL, Thermax and BGR Energy. L&T, with increased focus on international geographies, expects to garner significant orders from Middle East.
Capex expected to pick up as rate cut hopes gather steam
After dismissal GDP data for Q4FY12 at 5.3% (lowest in nine years), central bank is likely to cut rates to spur growth. This hope is further reinforced by RBI Deputy Governor’s recent statement that there is some elbow room to cut rates. This rate cut (along with more over the next 12-15 months) will help trim overall cost of funds and is likely to spur industrial capex. However, we believe policy initiatives w.r.t. key issues like coal and iron ore mining and environmental clearance issues will be key to determine the extent of recovery in industrial spending besides demand from various industries.
Outlook: Prefer Crompton Greaves, L&T, Havells; avoid BHEL, ABB
In the backdrop of little movement on the policy front and severe dent in domestic industrial capex, we believe diversified business models are better positioned to weather the storm; hence, we prefer Crompton Greaves, L&T and Havells India. Also, their resilient business models provide excellent opportunity in the overall uptick in industrial capex. We remain negative on the power generation equipment business as project developers face over capacity, fuel availability and environmental clearances issues. Recommendavoiding BHEL and ABB in the equipment space.
Regards,
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