Voltas, Thermax, KEC International top picks: PLilladher
Prabhudas Lilladher has come out with its report on capital goods space. Voltas, Thermax, KEC International and Power Grid are the top picks in capital goods space.
Capital Goods index has outperformed the broader index by ~1.9% over the last three months. While the most of macro data that came out recently continues to point continued weakness, the outperformance has come on the back of hope of improved government appetite for action/reforms after recent token reforms like SEB bailout, FDI in retail, hike in diesel prices etc. How soon government follows up with concrete reforms in area of coal, land and quick clearance remains to be seen. Till then we survive on hope!
Order flow de-grows 22% YoY; element of hope built in expectation of improvement: Order flow for the quarter for our coverage universe was down 22% to Rs313bn (excl. L&T orders which were down 57% YoY). The order flow had shown some hope last quarter (Q1FY13) by growing 28% YoY after four quarters of de-growth. While commentary on T&D order and short-cycle order continued to be encouraging, commentary on infrastructure projects, industrial recovery and global markets continues to be subdued. The recent token policy reforms and expectation of rate cut has resulted in hope of recovery for most players.
The order book for the sector was down 3.5% YoY to Rs3.48trn, with B2B ratio of 2.2xTTM sales (down from peak of 2.92x in Q2FY11). The macro data, be it weak IIP numbers, dismal capacity utilization data (RBI data suggest it is at 13-quarter low), CMIE’s new project announcement (back to 2004 levels), suggest continued weakness. However, the corporate commentary suggested that things should improve in the second half suggesting that bottom might be formed, but hope of some government action to kick-start investment cycle is building hope of recovery (which remains to be seen). Quick formation of national investment board could improve hope of fast tracking of big ticket infrastructure projects and removing bottleneck of slow clearances.
Margin pressure continues to persist: EBITDA for the sector was up 2.8% YoY to Rs40.2bn. Margins for the sector came down by 46bps YoY to 11.2%. 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 continues to drag earnings: Interest cost for the sector was up 25% YoY. Rise in interest expense was across the board. 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 growth was at 2.3% YoY.
Our top pick in the sector are Voltas, Thermax, KEC International and Power Grid.
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