Sector Preview Q3FY15 - Capital Goods :: HDFC Securities

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Capital Goods Sector | Q3FY15E Results Preview (Kalpataru Power Transmission, Alstom T&D India, BGR Energy Systems, BHEL, Crompton Greaves, Greaves Cotton, Voltas, Siemens & ABB India) :: IndiaNivesh

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

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Capital Goods 3QFY15E Results Preview :: HDFC Securities

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Capital Goods Sector | Q2FY15E Results Preview ::IndiaNivesh

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Machinery Balance Sheets of Industrials – Comparable Analysis:: Jefferies

Key Takeaway
The business cycle for industrial companies has been difficult post FY08-09.
Some companies have managed the environment better than the others. On
several occasions, we have discussed that segment leadership is a critical
element. This is reflected in the balance sheets of Cummins, Crompton
Greaves (CRG) and Thermax, with segment leader Cummins seeing far less
deterioration in this cycle. We expect this comparative trend to continue.
Cummins' monetisation focus on debtor days: In the downturn, Cummins'
management has focused on monetising revenue to cash flow, rather than growth, reflected
in Cummins reducing its debtor days by 20% from 76 in FY08 to 61 in FY13 (Exhibit 1).
Thermax has seen a sharp deterioration in debtor days in FY13 to 99 vs 73 in FY12 and 49 in
FY08. Crompton has seen a more gradual deterioration of about 10% during FY08-13. For
debtors more than six months old, Cummins is the least at 2% of overall debtors followed
by Crompton at 12% and Thermax at 14% in FY13 (Exhibit 2).
Thermax's working capital moves to positive from a negative cycle: Working
capital trends are a good indicator of business stress. Thermax has been among the best
in working capital cycle management, which has been negative for the company given
advances. However, as order flow has seen pressure, Thermax’s working capital has seen
some deterioration (Exhibit 3). While it still remains fairly low at +5%, trend-wise it has
worsened from a band of -15%-0% over the past 5-7 years. CRG’s overall working capital
has been broadly stable at 5-10%, while Cummins has seen improvement from 20% levels
to 14%.
CRG’s FY13 ROE falls to 2% from a peak of 38%: Clearly, of the three companies, CRG
has seen the sharpest deterioration in profitability. The company’s ROE has fallen from a high
of 38% in FY10 to 2% in FY13 (Exhibit 4). Despite assuming cost benefits from restructuring,
we anticipate this to be well below 20% levels even over the next 2-3 years. Thermax has seen
its ROEs more than halve from a peak of 43% in FY08 to 19% in FY13. The sharp deterioration
has been YoY as well, from 27% in FY12 to 19% in FY13. Cummins has managed to contain
ROE erosion given its high dividend payout ratio (ROE 30% in FY13 v/s peak of 35% in FY11
and 34% in FY09).
Is the past reflective of the future? Over the past six years, in a difficult backdrop, CRG
and Thermax have lost upwards of 30% from their peak share price levels vs Sensex 10%
off its peak. Cummins, on the contrary, has risen by 50% vs its peak levels. FY13 annual
reports and B/S of these companies clearly spell out the reasons. Cummins' 1HFY14E will be
likely weak given seasonally lower power deficit has impacted genset sales (see report, Power
Deficit: Seasonal Fall, published on 5 July 2013). However, if power deficit recovers during the
year, as supply growth averages lower and demand growth remains steady, genset sales will
recover, in our view. On the other hand, we believe pricing pressure globally will continue
to hurt earnings of Crompton and Thermax.

Industrials: Telecom: reports by Kotak Securities

Sector
Industrials: Feedback indicates weak business; Government action offers some
hope

Telecom: RCOM raises base tariffs; significant or irrelevant?

‘Equity capital will elude power, infra sectors’ :: Business Line

The Planning Commission estimates $1 trillion investments in the infrastructure sector during the current Plan period ending March 2017. Given the challenges surrounding the sector, these targets may not be achievable, says Vikram Limaye, Deputy Managing Director, IDFC.

Business Line spoke to Limaye to get his views on the outlook and prospects of the infrastructure sector. He believes that availability of equity, and not debt capital, will be the biggest challenge for infrastructure companies in future.

Industrials: Strong execution on current backlog but not yet positive on incremental inflows ::Kotak Sec, PDF link

Industrials: Strong execution on current backlog but not yet positive on
incremental inflows
` Strong execution on BHEL projects perceived as risky may lead to near-term
execution surprise
` 12-15 GW bid pipeline visible though finalization uncertain; surprising
dependence on Adani MDO
` CEA outlines 103 GW of under-construction thermal projects versus 64 GW
XII plan target
` Revise execution estimates; retain SELL on likely sedate incremental
ordering and competition

Capital Goods Sector Update --Learning to live with uncertainty!!!: Prabhudas Lilladher,

Capital goods index has outperformed the broader index by ~5% over the last three
months. Government off-late has been making lot of positive noises which hasn’t
been backed by concrete action. RBI’s ability to act has been hindered by
government inaction on the fiscal front and high inflation, while government
perceives rate cut as a way to boost growth. Recent downgrade of GDP estimate for
FY13 and risk of rating downgrade has added to the uncertainty. So India Inc.
continues to live with an uncertain outlook albeit with a hope of revival for the time
being (as it has been for last several quarters). We might be closing in but it’s still
tough to call the bottom yet.

Engineering and Capital Goods - Expectations Galore; monthly update ::Edelweiss

Monthly highlights: What’s inside?

·       Business outlook commentary

·       Management interactions/ channel checks

·       Key highlights/ news for companies/ sector

·       Q1FY13 review

Industrials: T&D: PGCIL ordering remains buoyant; foreign vendors taking away lion's share : Kotak Sec, PDF link

Industrials
India
T&D: PGCIL ordering remains buoyant; foreign vendors taking away lion’s share.
PGCIL awarded Rs60 bn of orders in the seasonally weak 1Q with award of 3,000 MW
HVDC terminal. The trend of more than 50% of equipment ordering going to foreign
vendors has sustained and in 1QFY13 even substation ordering has followed the trend.
The competitive intensity continues to increase with entry of new players in substations
(New North East Electric, China and East Green Power, Singapore) and towers (NCC
Saudi Arabia). 765 KV transformer pricing does not show any pick-up with recent ABB
bid of Rs100 mn/unit.

Engineering & Capital Goods - Expectations galore; monthly update: Edelweiss PDF

Monthly highlights: What’s inside?

•       Q1FY13 earnings preview

•       Management interactions

•       Key highlights from annual reports

•       Key highlights/ news for companies/ sector

•       Key sector/ macro trends

Engineering and Capital Goods - Gathering steam; sector update :Edelweiss PDF link

We recently visited several industry players in the T&D space, the Dedicated Freight Corridor Corporation (DFCC), Delhi Metro, among others, to understand the near to medium term growth potential and on-the-ground execution. Based on our interactions and meetings we returned convinced that the over the forthcoming 12-15 months activity in T&D projects led by PGCIL is likely to sustain decent traction. Also, DFCC and Delhi Metro are likely to gather pace, given reasonable milestones attained so far in both projects.

Infrastructure special report: UR Associates

Manmohan Singh promises to speeden up infrastructure development
Prime Minister Manmohan Singh on Wednesday (June 06, 2012) sent a strong
signal by outlining an ambitious agenda to put infrastructure projects on the fast
track. He promised a big push to infrastructure development and pledged quick
action in awarding airports, highways and port projects in a meeting with
ministers and top officials from the power, coal, aviation, railways, highways and
shipping ministries. With Indian economy in doldrums and general elections
round the corner, this was anticipated. The Prime Minister said that
infrastructure development was a key part of the strategy to revive the India
growth story and has outlined an impressive target for the same.

Infrastructure Order Inflow Pulse ‐ May: Prabhudas Lilladher,

Engineering & Construction
Synopsis
Ordering activity was mainly seen in the Water and Building segments. The total
order inflow announced by various E&C players on BSE amounted to Rs53.1bn, down
by 26.8% on MoM basis. L&T announced the higher chunk of projects worth
Rs33.5bn followed by IVRCL at Rs6.5bn.

Infrastructure - a growth propeller; enabling thrust needed: Motilal OsSwal

Infrastructure - a growth propeller; enabling thrust needed

Opportunity canvas huge; LNT is the "Top Pick"
 The Prime Minister's Office (PMO) called for a review of the FY13 targets for key infrastructure segments - Roads, Power/
Coal, Railways, Aviation, and Ports.
 In the past, actual performance has fallen short of targets due to multiple hindrances, many of which are policy-related. In
this context, attention from the highest authority, the PMO, is positive.
 However, creation of an effective enabling framework, facilitating clearances and funding, is necessity.

Engineering & Capital Goods - Still under the clouds; monthly update: Edelweiss PDF link

Monthly highlights: What’s inside?

·       Q4FY12 earnings qualitative review.

·       Management interactions.

·       Key highlights from analyst meet / concall.

·       Key highlights/ news for companies/ sector.

·       Key macro trends.

Engineering and Capital Goods - Q4FY12 Result Review - In search of growth DNA :: Edelweiss, PDF link

SECTOR FLOP: BSE CAPITAL GOODS INDEX :Business Line

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With a decline of close to 30 per cent in the last one year, the BSE Capital Goods index is among the worst performers in the list of sector indices. With a motley group of engineering, electrical, electronic and shipbuilding companies, this index has been underperforming since the 2008 slowdown.

The index' underperformance can be primarily attributed to high weights awarded to companies that are dependent on the power sector. ABB, Siemens, BHEL, Alstom Projects and Thermax, to name a few, fall under this category. Dearth of fresh orders in this space (although there has been a recent pick up), besides intensified competition from overseas players have been the key reasons for this sector's underperformance.

At 14.3 times trailing earnings, the index, although seemingly cheap, has been struggling to improve the earnings of companies in its basket.

Suzlon Energy was the worst performer in the basket. Falling 61 per cent in a year, concerns of the company's ability to repay its debt pulled down this stock. Crompton Greaves was another stock that was badly hit as a result of the slowdown in its domestic business as well as in its subsidiaries.

That said, the prospects of the index are tied chiefly to the stock of L&T, what with the stock receiving a weight of 15 per cent. The stock fell over 20 per cent in the last one year.