Emkay handpicks L&T, Thermax, Voltas, Greaves Cotton

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Emkay handpicks L&T, Thermax, Voltas, Greaves Cotton

Emkay Global Financial Services has come out with its report on Engineering & Capital Goods.

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Emkay Global Financial Services has come out with its report on Engineering & Capital Goods.

EMKAY ECG universe order inflows decline 62% yoy and 66% qoq in Q3FY12E and by 27% yoy in 9MFY12E - below expectations. Q4FY12E implied order inflows stand at Rs668 bn (or +8% yoy) - equivalent to 46% of FY12E target inflows and at higher end of historic band. Achieving target to be a daunting task. Risk to FY12E earnings negligible. But risk to FY13E earnings exists from low order book cover and deferral of orders. Risk to earnings least for L&T , BHEL and McNally Bharat . Prefer companies with adequate order book cover, low asking rate for Q4FY12E and low risk to earnings. We like L&T, Thermax , Voltas and Greaves Cotton .

Thus far EMKAY ECG universe witnessed tepid order inflows in Q3FY12E - lower than expectations. Based on announcements thus far, EMKAY ECG universe secured orders worth Rs131 bn (lowest in past 23 quarters) - representing a steep decline of 62% yoy and 66% qoq.

• Orders largely received from building and construction sectors. Power, process and hydro-carbons remain inactive.
• Delay in order finalization continues. For instance NTPC 11x660 MW bulk tender yet to be finalized.
• No revival in export orders.
• Decline in order inflows led by BHEL (-92% yoy), L&T (-44% yoy) (*), Punj Lloyd (-89% yoy) and Elecon Engineering (-41% yoy)

Led by a dismal performance in Q3FY12E, order inflows declined sharply by 27% yoy in 9MFY12E to Rs798 bn. This is the steepest fall in the past 7 years. Decline in orders was across sectors led by Power, Process and Hydrocarbon sectors. Only Punj Lloyd (+15% yoy) and McNally Bharat (+5% yoy) have reported growth in order inflows in our ECG universe while Thermax (-6% yoy) and Blue Star (-1% yoy) witnessed marginal declines. For the rest of our ECG universe, decline in order inflows has ranged between -94% and -19% yoy. Q4FY12E implied orders equivalent to 46% of FY12E target order inflows - At the higher end

At Rs 668 bn, the Q4FY12E implied order inflows are equivalent to 46% of our FY12E target order inflow of Rs 1466 bn. This is sharply higher than the range of 27% to 36% for our ECG universe observed in past 5 years - increasing the risk to achieving FY12E target order inflows.

• The range was lower at 27-32% during the capital goods cycle of FY06-09 period and shot up to 36% only during FY10-11 period

• The above high asking rate is despite the sharp +20% cut undertaken in our FY12E order inflow assumptions in our report "Delusional optimism to reality" dated 19 Oct'11.

• Even on considering additional order inflows (announced, if any, during the period until the results - as is generally observed in the case of L&T), the Q4FY12E asking rate is unlikely to go below 40% of FY12E target order flows à it will thus continue to remain at the high.

• The asking rate is the high for BHEL (32%), L&T (48% - could come down to upto 40%), Voltas (44%), TRF (94%) and Elecon Engineering (44%) We like companies with adequate order book cover, low order inflow asking rate for Q4FY12E, presence across multiple sectors & geographies and low risk to earnings. We like L&T (3.1X order book cover, presence across geographies and sectors, earnings growth estimates in top quartile of comparative peer growth), Thermax (demonstrated sustained order inflow momentum, healthy book-to-bill ratio at 1.2x, healthy cash flow generation, debt-free balance sheet) and Voltas (likely to be a key beneficiary of revival of investment spends in Middle East, concerns on Rohini Industrial Electrical and execution of few low margin orders seems fully factored in estimates - Consensus earnings downgrades remains key overhang). We also like Greaves Cotton (amongst the few companies with earnings 11% CAGR during FY11-13E period, strong cash flow generation and return ratios - ROCE at +40% and ROE at +30%).

FIIs holding more than 30% in Indian cos

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To read the full report click on the attachment