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India Equity Research Reports, IPO and Stock News
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India - CAPITAL GOODS
Insusceptible
We prefer BHEL, Crompton, Thermax, Voltas amid rising metal prices.
The 10-25% increase in metal prices over the past six months has varying
impacts on capital-goods plays. We expect a rise in material costs at BHEL
over FY11-14, but its Ebitda margin should widen by 200bps as the firm
has settled its employee costs and enjoys leverage benefits. T&D
companies are more susceptible; we find Crompton better positioned
than ABB since its international business has the potential to expand
margins. Overall, we like BHEL, Crompton, Thermax and Voltas, but
would avoid ABB and Suzlon.
Material costs have risen sharply in the past six months. Copper and
aluminium prices have increased by c.25% in the past six months (15-
30% over the past year), while steel prices have picked up by c.10%. We
note that material costs, which represent 60-70% of revenues of various
capital-goods companies, have risen sharply on two occasions in the past
seven years: in mid-2006 and since the beginning of 2010.
BHEL faces delayed impact; should be least impacted. BHEL (BHEL
IB - Rs2,067.9 - BUY) has historically seen the impact of changes in metal
prices with a six to nine months’ delay, on account of its higher inventory
turnover (six months versus one to two months for T&D companies).
Moreover, the firm has a lower exposure to nonferrous metals, and half of
its contracts have cost-escalation clauses. The group also tries to place
orders for most critical components within two months of getting an order.
We believe that supercritical equipments’ contribution to BHEL’s revenues
will also be limited to 10-30% over FY11-14. Consequently, fears of
margin contraction due to higher bought-out components for supercritical
equipment seem to be overdone. We factor in a 260bp increase in material
costs over FY11-14. Despite this, we believe the Ebitda margin should
expand by 200bps as its employee costs are now settled and the business
enjoys operating leverage benefits.
T&D companies susceptible; but Crompton can sustain margins. On
account of a lower inventory-turnover ratio, T&D companies face the
impact of rising metal prices almost immediately. Crompton Greaves (CRG
IB - Rs272.8 - BUY) is better positioned than ABB India (ABB IB - Rs811.6
- U-PF) as it should be able to pass on the cost increases in its consumer
business, where demand remains strong. Moreover, management believes
that margins should expand in its international business by 200-250bps on
account of efficiency measures (such as global sourcing).
Prefer BHEL, Crompton, Thermax, Voltas. Despite rising metal prices,
BHEL’s Ebitda margin should expand, while Crompton should be able to
sustain its margins over the next few years. Voltas (VOLT IB - Rs172.8 -
BUY) places back-to-back contracts with its suppliers for international
electromechanical projects (EMPs) and has undertaken price hikes in room
AC business in January 2011. This should help it mitigate cost pressures to
a large extent. We continue to like BHEL, Crompton, Thermax (TMX IB -
Rs587.8 - O-PF) and Voltas in this space and would advise investors to
avoid ABB and Suzlon (SUEL IB - Rs44.0 - U-PF).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Please see important notice on last page Page 1 of 2
India - CAPITAL GOODS
Insusceptible
We prefer BHEL, Crompton, Thermax, Voltas amid rising metal prices.
The 10-25% increase in metal prices over the past six months has varying
impacts on capital-goods plays. We expect a rise in material costs at BHEL
over FY11-14, but its Ebitda margin should widen by 200bps as the firm
has settled its employee costs and enjoys leverage benefits. T&D
companies are more susceptible; we find Crompton better positioned
than ABB since its international business has the potential to expand
margins. Overall, we like BHEL, Crompton, Thermax and Voltas, but
would avoid ABB and Suzlon.
Material costs have risen sharply in the past six months. Copper and
aluminium prices have increased by c.25% in the past six months (15-
30% over the past year), while steel prices have picked up by c.10%. We
note that material costs, which represent 60-70% of revenues of various
capital-goods companies, have risen sharply on two occasions in the past
seven years: in mid-2006 and since the beginning of 2010.
BHEL faces delayed impact; should be least impacted. BHEL (BHEL
IB - Rs2,067.9 - BUY) has historically seen the impact of changes in metal
prices with a six to nine months’ delay, on account of its higher inventory
turnover (six months versus one to two months for T&D companies).
Moreover, the firm has a lower exposure to nonferrous metals, and half of
its contracts have cost-escalation clauses. The group also tries to place
orders for most critical components within two months of getting an order.
We believe that supercritical equipments’ contribution to BHEL’s revenues
will also be limited to 10-30% over FY11-14. Consequently, fears of
margin contraction due to higher bought-out components for supercritical
equipment seem to be overdone. We factor in a 260bp increase in material
costs over FY11-14. Despite this, we believe the Ebitda margin should
expand by 200bps as its employee costs are now settled and the business
enjoys operating leverage benefits.
T&D companies susceptible; but Crompton can sustain margins. On
account of a lower inventory-turnover ratio, T&D companies face the
impact of rising metal prices almost immediately. Crompton Greaves (CRG
IB - Rs272.8 - BUY) is better positioned than ABB India (ABB IB - Rs811.6
- U-PF) as it should be able to pass on the cost increases in its consumer
business, where demand remains strong. Moreover, management believes
that margins should expand in its international business by 200-250bps on
account of efficiency measures (such as global sourcing).
Prefer BHEL, Crompton, Thermax, Voltas. Despite rising metal prices,
BHEL’s Ebitda margin should expand, while Crompton should be able to
sustain its margins over the next few years. Voltas (VOLT IB - Rs172.8 -
BUY) places back-to-back contracts with its suppliers for international
electromechanical projects (EMPs) and has undertaken price hikes in room
AC business in January 2011. This should help it mitigate cost pressures to
a large extent. We continue to like BHEL, Crompton, Thermax (TMX IB -
Rs587.8 - O-PF) and Voltas in this space and would advise investors to
avoid ABB and Suzlon (SUEL IB - Rs44.0 - U-PF).
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