Capital goods to report subdued performance in Q4: N Bang

Nirmal Bang has come with its March quarterly earning estimates for the capital goods sector. According to the research firm, capital goods sector is expected to report subdued performance for an otherwise seasonally strong January-March quarter.

Nirmal Bang Q4FY13 result preview for capital goods sector: We expect the capital goods sector to report subdued performance for an otherwise seasonally strong January-March quarter. New order inflows, key growth driver for the industry, have remained lukewarm as structural issues plaguing the power sector are affecting power equipment orders, while industrial orders have not revived due to deferment of capex by corporates. Revenue growth of companies in our coverage universe is expected to taper off due to declining order book, execution slippage and project deferral by clients. We project a 3.5% YoY decline in the combined revenue of companies in our coverage universe, at Rs 316.8bn. Profitability is likely to be under intense pressure as price under-cutting to win orders, high input costs and interest charges will keep margins suppressed. Combined EBITDA of companies in our coverage is poised to fall sharply by 22.1% YoY to Rs45.9bn, while PAT is likely to plunge 21.8% YoY to Rs32.1bn. Operating margin is expected to decline by 350bps YoY while net profit margin may fall by 240bps YoY. BTG segment running out 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 well as distorted demand-supply dynamics owing to over-capacity in the industry. We expect 4QFY13E revenue of Bharat Heavy Electricals or BHEL/Thermax/BGR Energy Systems to fall 6.0%/13.4%/8.6% YoY, respectively, owing to declining order book. Earnings are likely to remain under pressure, with BHEL/Thermax/BGR Energy Systems likely to report 260bps/60bps/80bps YoY fall, respectively, in net profit margin. Power T&D segment to witness pressure on margins Strong capex outlay of Power Grid Corporation of India (PGCIL) has partially aided order traction for transmission and distribution (T&D) players, but pricing pressure remains intense due to intense competition. We expect Crompton Greaves and ABB to post moderate revenue growth of 7.6% and 6% YoY, respectively, while in case of Siemens it may decline 7.7% YoY. KEC International is expected to post highest top-line growth in our coverage universe, at 14.3% YoY. The bottom-line is expected to be weak with Crompton/ABB/Siemens/KEC International posting 80bps/40bps/350bps/70bps fall, respectively, in net profit margin. Outlook We remain negative on BHEL and Thermax as lack of new incremental orders has 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 Systems offers healthy visibility at 3.4xFY12 revenue after the receipt of NTPC bulk tender orders, leading us to be positive on the stock. In the power T&D space, we remain negative on Crompton Greaves owing to lack of visibility on recovery in margins and continuous losses at its international operations. We also remain negative on ABB and Siemens due to their high exposure to industrial capex, which is yet to revive, and an unwarranted valuation premium. KEC International remains our top pick from the sector, as it is the key beneficiary of rising domestic and international power transmission capex.

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