Prabhudas Lilladher has come out with its report on capital goods. According to the research firm, Thermax, KEC International, Bharat Electronics (BEL) and Power Grid are the top pick in the sector.
"Capital Goods, order flow for the quarter for our coverage universe was up 13% to Rs317bn. The commentary on new orders was mixed bag with most corporate waiting to see real change at ground level after various measures taken by government recently. The outlook on industrials were largely subdued, however commentary suggest uptick expected in few industry like cement and Oil& Gas. On the infrastructure side the commentary in power BTG/roads continued to be weak with shrinking pipeline of new orders. The commentary in power T&D and urban infrastructure showed some positive trend. The companies also reiterated their focus on international markets to counter domestic slowdown.
The order book for the sector was down 2% YoY to Rs3.3trn, with B2B ratio of 2.2xTTM sales (down from peak of 2.92x in Q2FY11). Recent weakness in consumer segment in IIP numbers and weak commentary on festival sales are indicating towards moderating demand. CMIE’s new project announcement (back to 2004 levels), suggest continued weakness (down 55% for 9MFY13). While moderating inflation and weak growth has raised hope for steeper rate cuts over next 6 months to improve sentiment and to revive growth. However we believe real uptick in investment cycle will only happen after concrete measure is taken in areas of land acquisition, faster clearances processes and improving coal availability.
Sales for the quarter up only 6.3% YoY (12 quarter low ). Tight liquidity and delay in clearance at clients end is clearly taking toll on execution and impacting sales growth. EBITDA for the sector was down 13% YoY to Rs36.9bn. Margins for the sector came down shapely by 213bps YoY to 9.8%. Slower pace of orders over the last few quarters (leading to higher competition and lower margins) is clearly showing up in the margins, apart from increased raw material and weak rupee. Most companies acknowledged the increasing competitive intensity in both domestic and international markets. Slowing demand has made cost pass-through difficult, putting pressure on margins.
Interest cost for the sector was up 32% YoY. The interest cost for the sector has been rising at average 20-22% YoY for last 12 quarters now. Rise in interest expense was across the board. Interest cost % sales increased by 27bps to 1.37%. Apart from increased borrowing cost, the major culprit was the elongated working capital cycle (lower advances due to lower order flow and higher debtor days due to tight liquidity situation). PAT for the sector was down 11% YoY to Rs 26.4bn. Our top pick in the sector are Thermax, KEC International, Bharat Electronics (BEL) and Power Grid," says Prabhudas Lilladher research report.
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