Sector Preview Q3FY15 - Capital Goods :: HDFC Securities

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Q3FY15 is likely to witness some wide variations in performance of companies (in terms of revenues and margins) with company-specific factors at play. The overall sector earnings and
order inflow/backlog position will remain lackluster and management commentary is likely to be cautiously optimistic. The sector saw some traction in the Defence, T&D and Dedicated
Freight Corridor space. However, on the broader front, there was no action in terms of policy/project clearances. Rupee depreciation is likely to benefit export-oriented companies.
Ordering activity yet to fully take off....
Order placement activity during the quarter remained relatively muted as industrial capex did not revive. The BTG (Boiler, Turbine, Generator) segment has been severely hit following a
sharp slowdown in orders leading to over-capacity in the industry. Most of the companies operating in the EPC business were successful in garnering orders in Q3FY15. On the power
EPC side, BHEL won orders to the tune of Rs 4000 cr both in the domestic as well as exports markets while L&T continued to report order wins across geographies and segments to the
tune Rs 10000 cr (announced on the exchanges). Order placement in transmission and distribution segment has been on expected lines, with GIS orders being placed on ABB (Rs3.3bn)
and Siemens (Rs3.2bn). PGCIL’s execution remained strong buoyed by strong capitalization. PGCIL’s T&D ordering jumped 40% to Rs 42 bn during Q3FY15. In the defence sector, the
government has raised and notified increase in FDI to 49%, marking an important milestone as the government embarks on its ‘Make in India’ drive. In BTG, some ordering was seen by
PSU companies, which came as a relief for players with idle capacities. We expect uptick in overall investment in power, roads, ports, airports, etc., especially from private sector over the
next 3-4 quarters. While the new project announcement has seen an uptick, most of the other data points like Purchasing Managers Index, IIP and Gross Fixed Capital Formation are still
showing signs of bottoming‐out.
The quarter ended September 2014 recorded new investments worth Rs.2.5 trillion (up 129% y-o-y). The average quarterly announcement of new investment proposals in the first half of
fiscal 2014‐15 rose to Rs1.5trn. These 338 projects include 7 projects with investments above Rs.100 billion and 23 projects with investment above Rs.10 billion. More than one third of
the total investment was cornered by a single project. Stalling of projects dropped by 61 per cent during the quarter ended December 2014. 123 projects with investments worth Rs.999
billion were stalled. This was less than half the investments in projects stalled in the December 2013 quarter.
Overall Operational performance could be muted...
Revenue growth of capital goods companies is likely to remain suppressed owing to weak order book and softer execution traction With fewer orders and rising competition, the focus of
capital goods companies has turned to cost optimisation and higher indigenisation measures to protect trough-level margins. Overall Margins are expected to remain muted while
profitability will continue to be impacted by higher depreciation and interests costs. Diversified players are expected to be on a more firmer footing compared to others.
We expect a mixed trend to emerge in corporate earnings for the December 2014 quarter. Revenue growth is likely to remain modest owing to weak order book and lack of industrial
capex revival, while various cost optimization measures are likely to lead to an improvement in margin profile for some companies, albeit on a low-base. Order intake remained
muted across sectors. Management commentary on ground-level improvement in industrial capex and the outlook on new order inflow and price realisation will be keenly
monitored. Investments can be expected to gather pace over the next 2-3 quarters resulting in earnings upgrade cycle. Decent traction in the power equipment market over the
medium term can be expected with likely revival over the next few years. Companies with focus on diversified infra space like L&T are leading the investment-led rally. We prefer
companies with strong revenue growth visibility, sustained competitive advantage and currently facing under-utilisation of plants.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010805