Strong opening order books, execution pick-up, normalising supply chain situation and continued demand are seen helping infrastructure, capital goods and engineering companies post decent figures in the December quarter.
Overall, engineering, procurement and construction (EPC) companies like Larsen & Toubro (L&T), KEC International, Bharat Electronics and Cochin Shipyard are expected to remain focused on working capital and cash flow management amid better execution and concentrate on receivables collections, said ICICI Securities.
Besides, product-oriented companies like SKF India, ABB India, Elgi Equipment, and AIA Engineering, which have strong balance sheets, zero debt and healthy cash balances are likely to benefit as demand gradually returns to normal, the domestic brokerage firm added.
Elara Securities pointed out that major capital goods companies, excluding L&T, have announced cumulative orders of Rs 415 billion in the third quarter (Q3) of FY23, up 240 percent year-on-year (YoY), the highest quarterly rate in the past eight years.
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Revenue of capital goods companies in its coverage is likely to grow at 8 percent YoY in Q3 FY23 on higher order-book and improved execution, the brokerage firm added.
Softening of commodity prices and better supply chain management will help operating margin improve 38 basis points (bps) YoY and 11 bps quarter-on-quarter (QoQ) while net profit is expected to grow by about 24 percent YoY due to better operating performance, higher other income, and low leverage, Sharekhan said.
Capital goods companies are seen reporting around 15 percent YoY revenue growth, as per Sharekhan.
Even with the looming fear of recession, the companies have witnessed strong order bookings until now, but sentimentally, global orders may see some softening now, cautioned HDFC Securities. “In domestic markets, we expect recovery to continue, driven by both government and private capex,” the brokerage firm added.
HDFC Securities believes that in the long term, India might emerge as an alternative manufacturing hub for global markets. “We are witnessing increasing capacity expansion by MNCs in India to cater to domestic as well as global demand. The share of exports in the order book and revenue is increasing, with good demand support from Indian corporates.”
So far in FY23, valuation comfort, robust balance sheets, and strong order inflows have helped stock-specific rerating, and now, with inflation concerns easing, commodity prices cooling off, and peak-out in interest rate tightening, HDFC Securities sees further stock-specific rerating to play out in FY23.
For the sector bellwether, L&T, Jefferies believes the company is placed in a sweet spot as both, the Middle East and domestic markets are doing well, pointing to upside prospects on order flow from the Middle East. It is confident about the company’s stock rerating will be driven by peak of non-core investments being behind and better capital allocation.
Meanwhile, with better visibility on spending, the foreign brokerage firm thinks that Siemens should benefit from revenue and margin recovery in the power transmission and distribution (T&D) division.
Nomura said execution will remain strong for Siemens, supported by a robust order backlog. It sees strong operating margins on a YoY basis following pricing actions and recent softening of commodity prices. Nevertheless, sustenance of base order inflows will be keenly monitored.
Consolidated revenue of Siemens will increase by 12 percent to Rs 39,868 million in the December quarter, according to Nomura.
The foreign brokerage firm sees some modest benefits for ABB India and Siemens, due to their near-term hedging of commodities.
For L&T and KEC International, Nomura expects operating margin to expand to the extent of 70-100 bps for FY23 and 45-55 bps YoY for FY24.
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“Key monitorables from management commentaries will be guidance on margins, working capital, tender pipeline and update on supply chain scenario,” Prabhudas Lilladher pointed out.
Talking about the order inflows, ICICI Securities said that overall order inflows are expected to remain strong, with some project deferrals across key segments to Q3 FY23. The order pipeline remains robust across T&D, green energy corridor, data centres, railways, transportation, water and infrastructure, yet project delays or deferrals and lower conversion rate remain key risks.
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