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Industrials
India
RBI financial closure data: Weaker takeaways than broad consensus. RBI’s annual
financial closure (FC) data report (for FY2011 released in September 11) confirms the
broad investment slowdown but leaves us more worried given (1) flat financial closures
in FY2011 (Rs4.6 tn) over FY2010 even though FY2010 data has been pruned 20% on
cancellations, (2) argues for lower capex spending in absolute nominal terms, not just
slower growth, (3) half of FCs were in power where investment momentum has halted
(leading to doubt on actual capex and also on likely FY2012 FC activity).
RBI Financial closure data argues for absolute nominal investment decline, not just slower growth
RBI reported marginal 1% growth in financial closures (projects sanctioned institutional assistance)
for FY2011 to Rs4.6 tn. This is on top of a significant reduction in last year’s level (Rs4.6 tn from
Rs5.6 tn) on cancellation of 42 projects in FY2011. Note that financial closure data, though broad
based, has limited significance as (1) it takes the top 1,000 companies and does not include public
sector projects, and (2) it is a predictive measure (need not reconcile with national account
statistics). The Sep 2011 report also suggests the unlikelihood of FY2012 envisaged capex
matching a current potential decline in FY2012 envisaged capex from tracked financial data points.
Power drove FY2011 FCs, halt in momentum in that sector leads to incremental worry
Dominant share of power in financial closures (47% in FY2011 versus 30% last year) poses a big
concern in the prevailing weak power scenario (uncertain coal supply, delay in approvals, SEB
losses) affecting sector viability and offtake. Such large dependence may lead to (1) lower capex
from projects sanctioned versus investment intentions and (2) lower quantum of FY2012 financial
closures (base high). Further deterioration in investment momentum post FY2011 (interest rates up
150 bps, lower broad economy growth rate projections) may further squeeze financial closures
and thus capex momentum in FY2012.
Other cyclical indicators continue to suggest weak patch
We highlight slower growth in key physical indicators (cement, steel, credit and commercial
vehicles versus their 2005-2009 averages. Macroeconomic variables (IIP, capital goods imports,
projects added) also show moderation. Cyclical factors (interest rates doubling over past year) and
structural constraints (coal availability, clearances, land acquisition, slower demand scenario)) are
leading to a potential slowdown in the capex cycle. The impact of such a reduction in capex
activity is visible in declining ordering activity (down 13% yoy in 1Q).
Retain REDUCE on L&T, Thermax, BHEL, +ve view on CRG/Voltas as earning stress may be priced in
We maintain our negative view on equipment suppliers on a slowdown in utility capex and
reiterate our REDUCE rating on BHEL (TP:Rs1,800) and Thermax (TP: Rs550). We also maintain our
REDUCE rating on L&T on potential disappointment related to order booking, revenues and
margins.
We reiterate our BUY rating on CRG on attractive valuations, diversified business across segments
and geographies and capability expansion. The present stock price appears undervalued even on
stress case earnings (13XFY2013E). We use a similar argument (diversification, undervalued on
stress case earnings) for Voltas (BUY, TP:150).
Flat financial closures for FY2011 despite downward revision to last year levels
The amount of financial closures (cost of projects sanctioned institutional assistance) for
FY2011 amounted to Rs4.6 tn, implying a marginal 1% increase from FY2010 levels. Last
year’s envisaged expenditure has also been revised downwards to Rs4.6 tn from Rs5.6 tn on
account of cancellation of 42 projects during the current year.
Financial closure data is provided by Reserve Bank of India (RBI) on an annual basis and
captures private and joint business sector) projects achieving financial closure from banks
and financial institutions. Data is adjusted for financing raised from external commercial
borrowings (ECBs) and initial public offerings (IPOs). This data does not include projects of
public sector entities such as NTPC etc and does not include direct government financed
projects.
External commercial borrowings tied up for fixed assets were about Rs316 bn in FY2011
(6.4% of total financial closures of Rs4.9 tn domestically). ECBs declined in FY2011
fromRs324 bn in FY20010 and Rs312 bn in FY2009. This is likely to be a reflection of
weaker international capital markets.
Capex envisaged grows moderately; FY2012 unlikely to grow further
Capital expenditure by the private and joint sectors during FY2012, based on the capex
phasing plan of projects sanctioned assistance till FY2011-end, is estimated at Rs3.5 tn (up
5% on an yoy basis) versus Rs3.3 tn in FY2010. Combined with ECB and equity funding, the
quantum increases to Rs3.8 tn. Excluding the envisaged contribution in FY2012 from
sanctioned projects, an additional Rs1.1 tn of new investment from FY2012 financial
closures is required to match FY2011 levels. The report suggests that such high requirement
from FY2012 FCs is unlikely and expects the capital expenditure to fall this year.
Dominant power share, rising interest rate may curtail FY2012 financial closures
Power sector accounted for Rs2.2 tn or47% of financial closures in FY2011 implying yoy
growth of 61%. Such a dominant share would amount to 52-55 GW projects worth of
power addition assuming most of the closures pertained to generation segment.
Telecom on the other hand declined to Rs265 bn from 875 bn (5.8% share versus 19.2%
share last year and 10.2% the year before) as companies focused more on facing
competition than on capacity and capability expansion. We highlight that FY2010 possibly
bears most of the impact of spectrum payment which totaled Rs678 bn. Discounting the
whole of the spectrum payment implies 20% growth in sanctions in FY2011.
A decline was also seen in the investment intentions in the construction sector, with its
share declining to 2.8% from 10.3% in the previous year.
Increased dependence on power sector does not bode well for financial closures going
forward in the present power scenario of (1) uncertain linkage, (2) delays in clearances (30
high quantum of projects having already been awarded) and (4) keen competition. Weak
utility capex may lower capex from sanctioned projects and may also limit quantum of
financial closures. Interest rates have also increased by about 150 bps in FY2012 and would
further constrain financial closures.
Limitations of methodology – excludes projects not seek bank funding
We highlight that this methodology focuses on private sector capital expenditure above a
certain limit (i.e. Rs100 mn) and does not include projects that are completely funded by
other sources such as (1) internal accruals, (2) ADR/GDR issuances etc. RBI does, however,
attempt to include projects that have raised resources from external commercial borrowings.
This methodology does not include funding originating from (1) central and state
government, and (2) public sector companies. The methodology is based on RBI collecting
data from banks and financial institutions regarding projects that have achieved financial
closure. The project data is then tabulated to calculate planned capital expenditure year-wise.
Sedate ordering for industrial companies reflective of slowdown in capex cycle
The recent slowdown in ordering is visible in our tracking of ordering activity (since FY2005).
The ordering has fallen 13% in 1QFY12 (moving average growth used in Exhibit below) and
has been stagnant over the past three quarters.
Continued weakness in leading physical indicators versus five-year average
growth
We highlight declining growth trends in production/consumption of physical commodities.
Both cement and steel continue to grow at single digit rates for the past 3-4 quarters,
significantly below their average over FY2005-09. Even growth in the sale of commercial
vehicles appears to be on a downtrend though present levels (22% growth in 1QFY12) still
appear respectable. Growth in non-food credit demand at 21% in 1QFY12 was also below
the average growth rate of 27%.
Macroeconomic variables stagnate post recovery; past downturns lasted for 2-3 years
We highlight stagnant/marginal growth in (1) projects added in FY2011 (flat yoy) and
(2) capital goods imports (8% growth). IIP growth (new series) has moderated post a sharp
recovery in 2HCY10. Even gross capital formation at an aggregate level as increased by
about 3-4% in FY2011. All these macroeconomic variables point towards moderation post
recovery.
Previous downturn cycles in India have (1995-97 and 2000-02) has seen slow-growth
troughs of 2-3 years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials
India
RBI financial closure data: Weaker takeaways than broad consensus. RBI’s annual
financial closure (FC) data report (for FY2011 released in September 11) confirms the
broad investment slowdown but leaves us more worried given (1) flat financial closures
in FY2011 (Rs4.6 tn) over FY2010 even though FY2010 data has been pruned 20% on
cancellations, (2) argues for lower capex spending in absolute nominal terms, not just
slower growth, (3) half of FCs were in power where investment momentum has halted
(leading to doubt on actual capex and also on likely FY2012 FC activity).
RBI Financial closure data argues for absolute nominal investment decline, not just slower growth
RBI reported marginal 1% growth in financial closures (projects sanctioned institutional assistance)
for FY2011 to Rs4.6 tn. This is on top of a significant reduction in last year’s level (Rs4.6 tn from
Rs5.6 tn) on cancellation of 42 projects in FY2011. Note that financial closure data, though broad
based, has limited significance as (1) it takes the top 1,000 companies and does not include public
sector projects, and (2) it is a predictive measure (need not reconcile with national account
statistics). The Sep 2011 report also suggests the unlikelihood of FY2012 envisaged capex
matching a current potential decline in FY2012 envisaged capex from tracked financial data points.
Power drove FY2011 FCs, halt in momentum in that sector leads to incremental worry
Dominant share of power in financial closures (47% in FY2011 versus 30% last year) poses a big
concern in the prevailing weak power scenario (uncertain coal supply, delay in approvals, SEB
losses) affecting sector viability and offtake. Such large dependence may lead to (1) lower capex
from projects sanctioned versus investment intentions and (2) lower quantum of FY2012 financial
closures (base high). Further deterioration in investment momentum post FY2011 (interest rates up
150 bps, lower broad economy growth rate projections) may further squeeze financial closures
and thus capex momentum in FY2012.
Other cyclical indicators continue to suggest weak patch
We highlight slower growth in key physical indicators (cement, steel, credit and commercial
vehicles versus their 2005-2009 averages. Macroeconomic variables (IIP, capital goods imports,
projects added) also show moderation. Cyclical factors (interest rates doubling over past year) and
structural constraints (coal availability, clearances, land acquisition, slower demand scenario)) are
leading to a potential slowdown in the capex cycle. The impact of such a reduction in capex
activity is visible in declining ordering activity (down 13% yoy in 1Q).
Retain REDUCE on L&T, Thermax, BHEL, +ve view on CRG/Voltas as earning stress may be priced in
We maintain our negative view on equipment suppliers on a slowdown in utility capex and
reiterate our REDUCE rating on BHEL (TP:Rs1,800) and Thermax (TP: Rs550). We also maintain our
REDUCE rating on L&T on potential disappointment related to order booking, revenues and
margins.
We reiterate our BUY rating on CRG on attractive valuations, diversified business across segments
and geographies and capability expansion. The present stock price appears undervalued even on
stress case earnings (13XFY2013E). We use a similar argument (diversification, undervalued on
stress case earnings) for Voltas (BUY, TP:150).
Flat financial closures for FY2011 despite downward revision to last year levels
The amount of financial closures (cost of projects sanctioned institutional assistance) for
FY2011 amounted to Rs4.6 tn, implying a marginal 1% increase from FY2010 levels. Last
year’s envisaged expenditure has also been revised downwards to Rs4.6 tn from Rs5.6 tn on
account of cancellation of 42 projects during the current year.
Financial closure data is provided by Reserve Bank of India (RBI) on an annual basis and
captures private and joint business sector) projects achieving financial closure from banks
and financial institutions. Data is adjusted for financing raised from external commercial
borrowings (ECBs) and initial public offerings (IPOs). This data does not include projects of
public sector entities such as NTPC etc and does not include direct government financed
projects.
External commercial borrowings tied up for fixed assets were about Rs316 bn in FY2011
(6.4% of total financial closures of Rs4.9 tn domestically). ECBs declined in FY2011
fromRs324 bn in FY20010 and Rs312 bn in FY2009. This is likely to be a reflection of
weaker international capital markets.
Capex envisaged grows moderately; FY2012 unlikely to grow further
Capital expenditure by the private and joint sectors during FY2012, based on the capex
phasing plan of projects sanctioned assistance till FY2011-end, is estimated at Rs3.5 tn (up
5% on an yoy basis) versus Rs3.3 tn in FY2010. Combined with ECB and equity funding, the
quantum increases to Rs3.8 tn. Excluding the envisaged contribution in FY2012 from
sanctioned projects, an additional Rs1.1 tn of new investment from FY2012 financial
closures is required to match FY2011 levels. The report suggests that such high requirement
from FY2012 FCs is unlikely and expects the capital expenditure to fall this year.
Dominant power share, rising interest rate may curtail FY2012 financial closures
Power sector accounted for Rs2.2 tn or47% of financial closures in FY2011 implying yoy
growth of 61%. Such a dominant share would amount to 52-55 GW projects worth of
power addition assuming most of the closures pertained to generation segment.
Telecom on the other hand declined to Rs265 bn from 875 bn (5.8% share versus 19.2%
share last year and 10.2% the year before) as companies focused more on facing
competition than on capacity and capability expansion. We highlight that FY2010 possibly
bears most of the impact of spectrum payment which totaled Rs678 bn. Discounting the
whole of the spectrum payment implies 20% growth in sanctions in FY2011.
A decline was also seen in the investment intentions in the construction sector, with its
share declining to 2.8% from 10.3% in the previous year.
Increased dependence on power sector does not bode well for financial closures going
forward in the present power scenario of (1) uncertain linkage, (2) delays in clearances (30
high quantum of projects having already been awarded) and (4) keen competition. Weak
utility capex may lower capex from sanctioned projects and may also limit quantum of
financial closures. Interest rates have also increased by about 150 bps in FY2012 and would
further constrain financial closures.
Limitations of methodology – excludes projects not seek bank funding
We highlight that this methodology focuses on private sector capital expenditure above a
certain limit (i.e. Rs100 mn) and does not include projects that are completely funded by
other sources such as (1) internal accruals, (2) ADR/GDR issuances etc. RBI does, however,
attempt to include projects that have raised resources from external commercial borrowings.
This methodology does not include funding originating from (1) central and state
government, and (2) public sector companies. The methodology is based on RBI collecting
data from banks and financial institutions regarding projects that have achieved financial
closure. The project data is then tabulated to calculate planned capital expenditure year-wise.
Sedate ordering for industrial companies reflective of slowdown in capex cycle
The recent slowdown in ordering is visible in our tracking of ordering activity (since FY2005).
The ordering has fallen 13% in 1QFY12 (moving average growth used in Exhibit below) and
has been stagnant over the past three quarters.
Continued weakness in leading physical indicators versus five-year average
growth
We highlight declining growth trends in production/consumption of physical commodities.
Both cement and steel continue to grow at single digit rates for the past 3-4 quarters,
significantly below their average over FY2005-09. Even growth in the sale of commercial
vehicles appears to be on a downtrend though present levels (22% growth in 1QFY12) still
appear respectable. Growth in non-food credit demand at 21% in 1QFY12 was also below
the average growth rate of 27%.
Macroeconomic variables stagnate post recovery; past downturns lasted for 2-3 years
We highlight stagnant/marginal growth in (1) projects added in FY2011 (flat yoy) and
(2) capital goods imports (8% growth). IIP growth (new series) has moderated post a sharp
recovery in 2HCY10. Even gross capital formation at an aggregate level as increased by
about 3-4% in FY2011. All these macroeconomic variables point towards moderation post
recovery.
Previous downturn cycles in India have (1995-97 and 2000-02) has seen slow-growth
troughs of 2-3 years.
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