From the sidelines of Kotak Institutional Equities and global investor conference, Lokesh Garg who tracks the capital goods space shared his readings and outlook on that space in an interview to CNBC-TV18.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Have you changed your estimates on any of the companies under your coverage post Q3 numbers? Which direction would they be going in?
A: Essentially, in our view, Q3 numbers reflected the weakness in capex scenario that has been persistent now for more than one and a half years. The more it persists, more it starts to show up in numbers. So, in that sense, in several cases we had disappointment panning out in numbers to some extent, Starting from largecap stocks like Bharat Heavy Electricals Ltd (BHEL) and Larsen and Toubro (L&T) which had slightly slower or a difficult phase in terms of execution, particularly in the domestic markets.
In several other smaller companies, for instance in companies like Crompton Greaves,Thermax, Voltas we saw execution pressure building up. Moreover, since there has been very thin order booking over the last one to one and a half year, it has not been adequate to give full revenue visibility to some of these companies.So, there has been a little bit of pressure on margins.
Thankfully, most companies in the capital goods sector are extremely well run and they have ended up managing margin impact of the slower execution in a much better way.
Incrementally, however, in terms of capital goods particularly for long execution cycle companies like BHEL, Larsen, we would not focus on results per se but we would focus mostly on how the scenario in terms of incremental order inflows is changing.
Although there is an early sign of stabilization coming through but one cannot take a positive call that things will certainly look upwards from here.
Q: Stabilisation are coming through in which companies you would say perhaps in L&T, certainly not the entire bunch, isn’t it?
A: Yes, certainly not the entire bunch perhaps in more diversified name, in which L&T fits in. So that would be one stock which obviously benefits out of whatever stabilization happens over a period of time in the next six-nine months or thereafter.
Q: What is your sense from the conference itself, you have had some large companies with pockets deep enough to do capex, are you getting a sense that capex is perhaps likely at least by the end of the calendar year? You had Bharti, you had the Vedanta Group Chairman and the whole host of other companies, is there a sense that at least the worst is over, is anyone looking to expand?
A: I think capex still remains quite soft. We had companies from a very wide variety of sectors. Yesterday, we had lot of road companies coming to the conference and a lot of the projects, which have been awarded, are running behind schedule. In terms of the fact that they should have started some time back but they have not started as yet. In particular, this means with the revised growth expectations of broader economy, some of the financial viability parameters are also now under stress.
In that case, the entire sector is waiting for some bit of correction of the excessive optimism in bidding patterns that we saw in FY11 and FY12 largely. In our view, in some of the large sectors like power, incremental capacity addition from private sector is still away. To that extent, I think capex environment still remains soft.
Largely, there is a sense of early phase of stabilization of investments, which have been made and I think that will have to consolidate and complete first before we start talking of entrepreneurs committing large amount of capital incrementally.