Capital Goods 3QFY15E Results Preview :: HDFC Securities

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Capital Goods : Margin recovery will lead to earnings growth
 After a sharp run up, capital goods stocks under our coverage have
taken a breather as the market evaluates emanating risks in the
Middle East, along with possibility of a slower than expected
industrial revival in India. With valuations well above historical
average in most cases, further upsides will only be driven by earning
upgrades, in our view
 We prefer companies where (1) Capacity utilisation is low (2) Margins
are below historical average (3) Revenue growth is driven by short
cycle capex/industrial growth and/or (4) Valuations are reasonable.
Our top picks are L&T, CUMI and Crompton Greaves.
 For L&T we expect ex services order inflow of Rs 240-260bn. Revenue
growth should pick up as domestic execution improves. Performance
of the consolidated business will be keenly watched out for given
increased uncertaintiesin the middle east.
 BHEL’s performance should remain muted given execution concerns
with its private sector order book. Margins and revenue both will fall
while order inflow should be in the range of Rs 70-80bn.
 We expect revenue growth for Thermax to pick up due to execution
of one large order. Order inflow is expected to be in the range of Rs
10-12bn. Management’s commentary on order inflow trajectory for
FY16 will be keenly watched out for. Cummins should report strong
earnings, driven by export led revenue growth. Management’s FY16
guidance will be the key monitorable.
 Crompton Greaves’ should report a steep jump in YoY profits due to
low base in 3QFY14. We expect a PAT of Rs 1.4bn for standalone
business and EBITDA margin of 0.7% for the overseas subsidiaries.
CUMI should also report strong YoY growth on a low base. Progress
on restructuring of South African business and performance of VAW
(Russian subsidiary) will be the key monitorables.
 Voltas should report a steady quarter driven by higher margins in the
UCP and MEP segments. Signs of any stress in MEP business due to
falling oil price and sustainability of high margin and growth in the
consumer durable segment will be the key monitorables.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010598