Capital Goods -ƒ ƒ Ordering environment picking up gradually, especially in Power :Q3FY15 Result Preview : ICICI Securities, report

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ƒ Ordering environment picking up gradually, especially in Power EPC
Most of the companies under our coverage operating in the EPC
business were successful in garnering orders in Q3FY15E. On the
power EPC side, BHEL won orders to the tune of |4000 crore both in the
domestic as well as exports markets while L&T continued to report
order wins across geographies and segments to the tune | 10000 crore
(announced on the exchanges). In the midcap space, Thermax failed to
announce any major order while it bagged an EPC order worth |351
crore. On the transmission EPC segment, KEC and Kalpataru won
orders to the tune | 1412 crore and | 560 crore, respectively. Va Tech
Wabag on the other hand reported order wins to the tune of 495 crore.
ƒ Financial sector performance bottoming out gradually…
. On an aggregate basis, we except the coverage to report 3.8% YoY
revenue growth while coverage excluding BHEL will report a 9% YoY
growth in the revenues, which will be the highest over last 8 quarters.
On the margins front, we expect muted margins mainly contributed by
BHEL’s (high weightage) YoY decline of xx bps in margins in Q3FY15E
whereas PAT is expected to decline 1% YoY. If we exclude BHEL from
the equation, PAT for the universe is expected to register a strong 12%
YoY growth. Most of the companies are expected to reap the benefit
operating leverage as margins (ex BHEL) will expand 60 Bps YoY while
interest cost to sales ratio is also expected to improve from 21% in
Q2aFY15 to 16% in Q3FY15E.
ƒ Majority of the sector to perform well relatively…
After many quarters of dismal performance, almost 80% of our capital
goods coverage will report positive growth across parameters. In the
large caps, L&T is expected to perform reasonably as we have built in
9% YoY and 7% YoY revenues and PAT growth respectively coupled
with 50 bps margin expansion while BHEL’s decline should moderate in
Q3FY15E as revenues and PAT are expected to decline ~9% YoY and
29% YoY, respectively coupled with 237 bps fall in margins. On the
midcap side, rub off positive operating leverage will be high as EPC
companies like Thermax, KEC, Kalpataru power and VA Tech Wabag
are expected to report PAT growth of 24.9%, 38,1%,38.6% and 24.4%
respectively, which will mainly be driven by pick up in
execution/improvement in margins and plateauing finance costs. With
respect to product based companies, we expect SKF and AIA
engineering to do well on all fronts as their PAT is expected to grow
24.4% and 74% YoY, respectively backed strong volume growth and
margin expansions.

5: Company specific view
Company Remarks
AIA Engineering The company is expected to continue with its robust volume growth performance
as we built in volume growth of 33% YoY at 55700 tonnes and realisation decline
of 9% YoY, which will lead to 19% YoY growth in revenues at | 608 crore.
Margins are expected at 26.8%, implying YoY expansion 390 bps. PAT is
expected at | 115.7 crore, implying a growth of 70% YoY ( Q3FY14 had a
exceptional provision of |30 crore).
Thermax After many quarters of decline, TMX is expected to deliver 18.9% YoY revenue
growth at | 1205 crore. However order inflows continue to weak as TMX bagged
only |351 crore in export market. Margins at 10% are expected to expand by 120
bps. Consequently, PAT is expected to grow 24.9% YoY to |83.3 crore.
Bhel Weak execution cycle for BHEL is expected to continue as we expect revenues to
decline 9% YoY to | 7869 crore. However, BHEL has managed to win few EPC
orders in the power segment to the tune of ~|4000. Negative operating leverage
will lead to decline in margins by 237 bps to 9.3% in Q3FY15E. Consequently PAT
is expected to fall by 29% YoY to | 490 crore.
KEC International KEC reported order wins of |1412 crore in Q3FY15E. We expect KEC to report 2%
YoY growth in revenues at |2235 crore. EBITDA margins are expected to expand
40 bps to 6.9% in Q3FY15E. Consequently, we expect PAT growth of 39% YoY to
|26.5 crore.
Kalpataru Power
Transmission
KPTL has reported order wins of |560 crore in Q3FY15E. However, we expect
strong execution of backlog to continue which will revenue growth of 15.2% YoY
to |1210.7 crore. We expect margins to expand by 60 bps YoY to 9.6%. Strong
execution and margin expansion will drive PAT to |46.5 crore, implying a YoY
growth of 38.1% in Q3FY15E.
Larsen & Toubro We expect L&T to report 9% YoY growth in revenues at | 15682 crore on the back
of reasonable execution in the infrastructure segment and export markets.
Margins are expected to expand 50 bps YoY to 12%. However high interest costs
of 20% YoY as PAT will grow 7% YoY to |1323 crore. Performance of
Hydrocarbon business will be the key
Greaves Cotton In line with Q2FY15 performance of the auto segment, we expect GRV to continue
to repeat the same growth of 13%-14% in the segment. However, closure of
infrastructure division will affect overall revenues as they are expected to be flat
at |420 crore. However margins are expected to expand 200 bps to 13.2%. PAT
is expected at |35.6 crore.
SKF India While auto segment of SKF is largely supported by the growth in the two
wheelers segment, the industrial activity pickup is yet to be seen. Consequently,
SKF is expected to post revenue growth of ~10% in Q4CY14E to | 659.5 crore
supported mainly by the auto segment. The margin expansion of ~150 bps YoY
to 13% is expected given the operating leverage as well as revenue mix skewed
towards the sale of manufactured goods. The bottomline at | 60 crore is
expected to grow by 23.9% YoY.
VA Tech Wabag Wabag has reported order wins of | 495 crore in Q3FY15 and an order backlog of
~| 5,600 crore. We expect strong execution of backlog to continue which will
lead to a 11.6% YoY growth in revenue. On margin front, we expect a 100 bps YoY
improvemnt to 8.0%. Accordingly, we expect PAT to grow at 24.4% YoY to |27
crore in Q3FY15E.
Source: Company, ICICIdirect.com Research



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