Engineering companies revenue growth to be moderate: Emkay

Emkay Global Financial Services Q1FY13 Result Preview for engineering & capital goods sector:

Deceleration in earnings growth to continue in Q1FY13E; Owing to deceleration in revenue growth momentum and yoy decline in EBITDA margins. At this juncture, resumption of investment spend is important versus earnings performance.

Revenue growth would moderate to 11% yoy to Rs276.9 bn - owing to lower order book covers, moderation in economic activity and longer execution cycles.

Growth moderation combined with rising input costs and lack of operating leverage, EBITDA margin expected to contract by 30 bps yoy to 11.9%. Correspondingly, EBITDA growth to be muted at 8% yoy to Rs33.1 bn.

Led by muted operational performance and higher interest & depreciation charges, APAT growth to decelerate to 5% yoy to Rs20.5 bn. Bhel (+10%), L&T (+7%), Thermax (+6%) and Blue Star (+68%) are expected to be outperformers while the rest of the universe is expected to post decline in net profits.

Expect marginal pick-up in order inflows in Q1FY13E following slippage of order finalizations in Mar’12 quarter. We expect order inflows to rise by 6% yoy to Rs281.5 bn and comprise 17% of FY13E target order inflows.

At 12.9X, the sector is trading just above the recent low (Lehman Crisis) of 11.5X. We believe that negatives and concerns are getting priced in. But, catalysts to sector i.e. order inflows and earnings growth are missing. Though, few catalysts like reduction in interest rates and input costs, easing of working capital are on anvil; timing is misplaced.

Emkay’s stock selection is purely driven by visibility, cash flows and ROIC of the business models. Our preferred BUYS are L&T, Cummins India and Greaves Cotton. These companies appear to be richly valued (on relative basis); these should be viewed in conjunction to strength of the business model.