Accumulate L&T, Cummins India; buy Greaves Cotton: Emkay
Emkay Global Financial Services has come out with its report on engineering & capital goods sector. The research firm has recommended to accumulate Larsen & Toubro (L&T), Cummins India and buy Greaves Cotton with a target prices of Rs 1759, Rs 500 and Rs 90 respectively, in its research report dated December 18, 2012.
December 19, 2012 / 17:13 IST
Emkay Global Financial Services has come out with its report on engineering & capital goods sector. The research firm has recommended to accumulate Larsen & Toubro (L&T), Cummins India and buy Greaves Cotton with a target prices of Rs 1759, Rs 500 and Rs 90 respectively, in its research report dated December 18, 2012.
In the current month’s update on the Engineering & Capital Goods (ECG) sector, we have put across a study of tendering in the power sector along with our usual assessment of tracking trends in project tenders, project awarding, production statistics, etc.Tendering in Power SectorYTD power sector (excluding distribution) has seen healthy order inflows at Rs242.6 bn (comprised 30% of YTD total order inflows). Correspondingly, companies exposed to power sector witnessed healthy order inflows in H1FY13 (up 4% yoy). But the asking rate for H2FY13E remains high at 26% yoy (ranges from -51% to +202% at company level). Tendering activity in power sector (comprising both distribution and equipments) has fallen to below average levels since the month of Jul’12 - indicative of possible fall in order inflows momentum in ensuing months.In the current month ECG monitor, we have analysed the nature of power sector tenders to gauge benefiting companies from the ongoing tenders in the power sector. Our analysis of tenders (opened since Oct’ 12) indicates:Tenders for BTG equipment or development of power plant itself - Remain healthy at 9,245 MW (6 tenders). But all the projects are in their initial planning stages and are yet to receive clearances (both environmental and coal) in most cases - leading to increased probability of delay in project commencement in current times. All of the tenders were in the public sector (either standalone or in PPP mode)Tenders for Material handling Equipment (MHE) - healthy at 42 tenders (including sub-contracting works) - This augurs well for companies in the MHE space which are likely to witness healthy order inflow momentum.Of the above, only 2 tenders were from private developers. BHEL has issued 9 tenders for sub-contracting MHE work. Key trends observed during the month In Nov’12, number of tenders increased by 16% MoM to 3,770 tenders (up 103% YoY on low base). In value terms, tenders grew 42% MoM and 57% YoY to Rs391.4 bn. MoM growth was led by roadways, while all other sectors declined.Tendering activity has remained healthy since past twelve months – largely range above 3,000 tenders per month. But benefits of low base expected to cease from Dec’12, expect muted growth on YoY basis in ensuing months.After 2 months of muted activity, order announcements improved sharply by 246% MoM to Rs174.7 bn – though growth on YoY basis was muted at 5.6% YoY. Strong growth was driven by Process sector (witnessed finalization of few large orders). Power equipments, water and railways also witnessed healthy order finalizations.Production data of capital goods equipment was largely increasing during the month of Oct’12 in case of low value capital goods equipment, power T&D equipment and construction equipment – grew on YoY basis (or remained stable in few cases). Only high value capital goods equipment declined on YoY basis.Emkay Commodity Price Index remains range bound between 194-196 levels. In Nov’12, Emkay commodity price index fell by 0.8% MoM to 194.2 (up by 0.9% YoY). Rubber prices have now declined for the 13th consecutive month on YoY basis.The domestic ECG sector largely under-performed the broader markets by 3.5%. But the international ECG sector witnessed strong price rise – stock prices rising +10% in 10 out of 19 companies tracked.Absolute ‘Sell’ ratings (as a % of total ratings) continued to rise… now stand at 40% Vs 35% ratings in favour of “Buy”.After minimal changes in consensus earnings estimates witnessed in the past 6 months, consensus earnings estimates were cut by 3.3% MoM for FY13E and by 2.7% MoM for FY14E.Top picks from EMKAY ECG universeWe maintain that stock selection should be purely driven by visibility, cash flows and ROIC of the business models. Few companies appear to be richly valued (on relative basis). These should be viewed in conjunction to strength of the business model. Our top picks in the ECG sector are (1) Larsen & Toubro (2) Cummins India and (3) Greaves Cotton.Larsen & Toubro - Strong order book cover with diversified business model and top quartile earnings growth amongst peers. We have Accumulate rating with price target of Rs1759/Share.Cummins India - Technology intensive business model with near-term earnings catalysts and ROIC of +40%. We have Accumulate rating with price target of Rs500/Share.Greaves Cotton - Though we expect muted earnings growth in near term, FCF yield of +8% gives reasonable comfort. We have BUY rating with price target of Rs90/Share.Non-Institutions holding more than 90% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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