Expect capital goods cos PAT to slip 13% in Q3: Nirmal Bang

Nirmal Bang has come with its December quarterly earning estimates for capital goods sector. According to the research firm, capital goods companies are expected to report modest revenue growth of 1.0% YoY at Rs 219 bn.

Nirmal Bang Q3FY13 result preview for capital goods sector:

We expect the engineering and capital goods sector to post weak performance for the quarter ended December 2012. Project deferral, execution slippage and declining order book are expected to suppress revenue growth, while intense competition and higher input costs as well as interest rates are likely to keep margins under pressure. We expect the companies in our coverage universe to report modest revenue growth of 1.0% YoY at Rs 219bn. Pressure on margins is likely to come to the fore as combined EBITDA of companies in our coverage universe is poised to decline by 6.5% YoY to Rs 25.1bn, operating margin to fall by 100bps to 11.4% and PAT to slip 13.0% YoY to Rs 16.3bn.

BTG segment falls short of orders

The Boiler Turbine Generator (BTG) segment has been severely hit due to a sharp slowdown in orders over the past two years as structural issues relating to coal/gas linkage, environmental/forest clearance and land acquisition continue to remain unresolved. This led to a significant fall in order backlog of BTG companies, thereby affecting their revenue traction. We expect 3QFY13E revenue of BHEL/Thermax/BGR Energy to fall 1.4%/7.2%/13.9% YoY, respectively. Profitability is likely to remain under pressure, with BHEL/Thermax/BGR Energy likely to report 80bps/80bps/240bps YoY fall, respectively, in operating margin.

T&D sector in cost rationalisation phase

Unlike the BTG sector, the power transmission and distribution (T&D) segment has witnessed healthy order placement activity over the past one year, primarily due to strong capex outlay of Power Grid Corporation of India (PGCIL). However, pricing pressure due to intense competition has led the companies to resort to various cost optimisation and increasing indigenisation measures to protect their bottom-line. We expect 3QFY13 revenue of T&D companies to post moderate revenue growth, albeit on a higher base of a year ago, with KEC International expected to post highest top-line growth in our coverage universe at 20.4% YoY. However, the operating margin is likely to be lower YoY due to higher input costs and intense competition.

Outlook

In the BTG segment, we remain negative on Bharat Heavy Electricals (BHEL) and Thermax as lack of new incremental orders led to a rapidly declining order book-to-bill ratio, resulting in their revenue/earnings momentum tapering off over FY12-FY14E. On the contrary, BGR Energy offers healthy visibility at 3.8xFY12 revenue after the receipt of NTPC bulk tender orders, leading us to be positive on the stock. In the T&D space, we remain negative on Crompton Greaves owing to a severe decline in its profitability and rising uncertainty over the extent of restructuring and downsizing costs of Belgium operations. We remain negative on ABB and Siemens due to their high exposure to industrial capex, which is yet to revive, and unwarranted valuation premium. KEC International remains our top pick in the sector because it is key beneficiary of rising domestic and international power transmission capex.

(Rs million)
Company Name	Revenue			PAT
	3QFY13E	YoY (%)	QoQ (%)	3QFY13E	YoY (%)	QoQ (%)
BHEL	104,000	-1.4	0	12,857	-10.3	0.9
Thermax	11,784	-7.2	-1.2	836	-12.5	-8.2
BGR Energy	6,922	-13.9	10.3	339	-38	-2.3
Crompton Greaves	30,679	1.3	4.9	543	-29.6	29.3
ABB	23,371	6.2	29.2	746	16.4	248.6
Siemens	24,693	4.3	-26.8	596	-15.7	-206.8
KEC	17,578	20.4	5.4	393	-51.2	138.2

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