Monthly highlights: What’s inside?
· Business outlook commentary
· Management interactions/ channel checks
· Key highlights/ news for companies/ sector
· Q1FY13 review
Q1FY13: Deferrals and delays continue to impact earnings
Core Q1FY13 operating profitability was below estimate due to higher input prices and impact of intense competition. Sustained delay and deferrals from clients, especially private sector, further dented profitability. The sector’s order intake remained healthy on back of infrastructure orders and lumpy power equipment (BTG) orders.
Weak business outlook commentary for near term
Generally, across industrials managements’ body language and commentary remained weak on account of sustained deferrals and delays from clients across power equipment, oil & gas, metals, cement sectors. Weak industrial demand coupled with regulatory hurdles is impacting the sector’s overall profitability. Sharp jump in working capital levels and interest costs contributed to pressure on overall profitability.
Downgrades bottoming out; policy action to act as key trigger
Q2FY12 and Q3FY12 witnessed major downgrades in the sector, where earnings cut have been in the 8-10% range. The cuts were largely witnessed in large caps while small caps were largely unscathed. The downgrades were predominantly on account of interest rate hike coupled with sustained policy paralysis depressing industrial capex cycle. Large players like L&T and BHEL have not seen any major upgrades or downgrades in the past two quarters. The downgrades in small caps happened in Q1FY13 mainly due to burgeoning interest cost burden. We believe the downgrade in earnings cycle is close to bottoming out.
Outlook: Stock selection critical; prefer Cummins, LT, CRG
While there is no respite from slow down in overall industrial spending and rising competition levels, a sustained pick up in private sector spending remains key to a meaningful recovery. Limited project closures and tight liquidity have been impacting players with limited revenue growth visibility and leveraged balance sheets. We maintain our preference for entities with strong revenue growth visibility, robust business positioning and market leadership, maintaining L&T, Crompton Greaves and Cummins India as our top picks.
Regards,
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