Prabhudas Lilladher has come with its March quarterly earning estimates for capital goods sector. As per the research firm, the end of tightening cycle and meaningful reforms will be the key for the sector to move from underperformance to outperformance.
Prabhudas Lilladher has come with its March quarterly earning estimates for capital goods sector. As per the research firm, the end of tightening cycle and meaningful reforms will be the key for the sector to move from underperformance to outperformance. However, underperformance is expected to continue in the near term as outlook on execution and fresh orders remains weak.
Over the last three months, the Capital goods index has outperformed the broader markets by ~11%. We expect sales for our coverage universe to grow by 16.8% YoY in Q4FY12. EBITDA margins are expected to be at 15.3% and PAT is expected to degrow by 5.7% (excluding Suzlon) for the quarter.
Pace of announcement of new investments continues to fall. New investment announcements fell to 27-quarter low, amounting to Rs1.9trn in December 2011 quarter (down 37% YoY) v/s Rs2.9.trn in September 2011 quarter (down 20% YoY) v/s Rs3.0trn in June 2011 quarter (down 51% YoY) v/s Rs3.1trn in March 2011 quarter (down 47% YoY). The number of projects shelved also continues to be high at Rs1trn in December 2011 quarter (up 267% YoY) v/s 1.9trn in September 2011 quarter from Rs479bn in June 2011 quarter. The increasing trend in projects shelved indicates the loss of confidence of corporate India on the demand sustainability, going forward.
Indicators like HSBC PMI for India indicates improvement in activity levels since October 2011, with the indicator moving from 52 to 56.6 in February 2012. However, other indicators like IIP have shown a volatile trend, making any conclusion on direction very difficult. Manufacturing IIP has been able to show ~7% MoM growth (Nov 2011-Feb 2012) and the consumer goods IIP growth for November 2011- February 2012 has also averaged at ~13%. The commentary on short-cycle product continues to be positive, with most companies witnessing growth in this business. Finalization of large projects continued to get delayed and the outlook for order booking continues to be weak. The Central bank has already signalled that it has reached the end of its tightening cycle. It has, however, put the ball in the government’s court by indicating that the quantum of rate cut will depend on fiscal consolidation plan of the government. With the budget, projected at 5.1% deficit, likely to over shoot and high crude prices posing risk to inflation, we expect the quantum of rate cut by RBI over the course of the year to reduce Repo rate by ~50bps against earlier expectation of 100bps postponing the recovery in investment cycle. We believe the end of tightening cycle and meaningful reforms will be the key for the sector to move from underperformance to outperformance. However, we expect underperformance to continue in the near term as outlook on execution and fresh orders remains weak.
The end market for Power equipment continued to be weak, with virtually no orders finalised in the quarter. The issue relating to coal shortage, environment clearance and SEB finances continues to haunt the sector. The stressed SEB finances are also putting strain on the working capital of many industries in the power value chain. We believe that a recent move by the PMO of asking CIL to sign FSA is a definite positive for the sector as a whole and will reduce concerns on financial distress on power utilities. We believe that though sentimentally it is positive, the measure is likely to have limited impact on the prospects of order booking for power equipment manufacturers as most of the projects for XII plan have already been ordered and IPP will also take time to put their house in order and gain confidence to plan new projects.
The much awaited 19% import duty on power equipments expected to be announced in the current budget did not come through. The imposition of import duty would have been a definite positive for the domestic manufacturers like BHEL, L&T, BGR, Thermax etc. as it would have improved competitiveness in terms of price. The bigger issue today is order finalization from the private players which is standstill due to issues like land, coal and SEB finances (with no signs of getting sorted out in hurry).
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READ MORE ON Prabhudas Lilladher, capital goods sector, EBITDA margins, HSBC PMI, RBI, SEB finances, BHEL, ABB, Cummins India, Crompton Greaves, Thermax, Suzlon Energy, Voltas, Kalpataru Power, BGR Energy, KEC Inter, Jyoti Structures, Action Construction
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