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Last Updated : Jun 08, 2016 01:51 PM IST | Source: CNBC-TV18

Investment cycle to revive by FY18 for infra, power ind: Thermax

Thermax MD MS Unnikrishnan said the industry may not see a full recovery in sectors like power, cement, steel, oil and gas and fertilisers.

Citi has a marginal underweight on infrastructure sector because there is a slow revival in capital expenditure, particularly of power and metal, says the brokerage's infrastructure analyst Venkatesh Balasubramanian.

Concurring with Balasubramanian's view, Thermax MD MS Unnikrishnan said the industry may not see a full recovery in sectors like power, cement, steel, oil and gas and fertilisers.

He is of the view that these are the prime movers for the country in terms of the infrastructure related investment and capex in the country.

However, Unnikrishnan is hopeful of an investment cycle revival possibly in FY17-FY18 for the sectors.

Below is the transcript of Venkatesh Balasubramanian and MS Unnikrishnan’s interview with Anisha Jain on CNBC-TV18.

Q: Do you still retain an underweight stance on infrastructure?

Balasubramanian: We still have a marginal underweight on it. Of course, the underweight position has reduced a bit after the quarter, but we still are worried because we believe that the revival in capital expenditure (Capex) especially on the power side and on the metal side is still some time away. And those were the two key drivers of Capex over the last 4-5 years. Actually it was a key driver of Capex over the last decade or so. And we are not seeing too much of revival in Capex in those two sectors and also the recent slowdown on the real estate side also worries us a wee bit.

Q: Venkatesh feels that the recovery is still a bit away and you as well have been telling us that there has not been a very big pickup seen in the order inflows. That has been stagnant for you. The utilisations have not really improved that much, but the question is that is this the worst of it? Will we see a better FY17 from you?

Unnikrishnan: Specifically on Thermax, you may have a flat year almost for FY17. But since Venkatesh has spoken about the industry, I tend to agree with him and concur with his contention that we may not see a full recovery in terms of the largest sectors, like power he has mentioned. Let me add a couple more of them. Cement, steel, oil and gas and fertilisers. These are the prime movers for the country in terms of the infrastructure related investment and Capex in the country and I do not expect any one of them to be reviving or sowing a improvement in the coming year. However the capacity utilisation in cement is gone up substantially in the last one quarter. Steel has moved a tad better.

And apart from that, we are seeing a lot of traction in the automobile industry which will mean the demand for refined petroleum is going to be increasing in the country. One way to put all of them together, we are possibly looking forward to an investment cycle revival possibly in FY17-FY18 for the sectors. Power I will not bet for some more time. I would wait for a year more on account of the fact that there is not too much of demand for industrial power and as you mentioned, unless construction sector picks up, you may not need residential power either. So that I would keep for a year down the line. So, we are not yet ready for a total revival of the Capex cycle.

Q: Venkatesh will concur with that view. You have a sell on the power ancillaries like Thermax and BHEL, but as you have recently upgraded Larsen and Toubro and the likes, would you say it is fair to play infrastructure sector through the transmission and construction players versus the power generation and power ancillaries?

Balasubramanian: At this point in time, it is better not to look at it from a top down perspective, but actually look at individual stocks from a bottoms up perspective. Just to give you an example, Larsen and Toubro had a phenomenal quarter ad valuations were cheap. So, obviously we are very constructive on the name. If you look at Voltas, that too had a very good quarter and we believe that the first quarter again will be very good. We really like the structural story in Voltas. Air conditioner penetration levels are at around 4-5 percent. So, we believe there is a big growth ahead of them over the next 3-4 years. All they need to do is work on their distribution network.

Similarly, if you see bottoms up, Bharat Electronics had a phenomenal year last year. Almost orders of around USD 170 billion which was three times the orders in the previous years. And even the execution has picked up. And most importantly, not only is the government giving them more orders, they are asking them to execute faster and lastly they are also paying them much faster. So, if I put everything together, Bharat Electronics, Voltas would be my top picks at this point in time. And it is preferable to look at it bottoms up rather than take a top down call.

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First Published on Jun 8, 2016 01:51 pm
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