Strong order flow, operating leverage keep Jefferies’ outlook on industrials’ positive for 2023

The profit figures improved on commodity prices cooling off and double-digit revenue growth.

Industrials companies saw a strong order flow in the last fiscal and the order flow growth will continue to remain in double digits the calendar year 2023, according to Jefferies. In 2023, operating leverage will surprise too, according to the analysts.

They said that the profit figures improved on commodity prices cooling off and double-digit revenue growth; and added that this trend could continue over the next four quarters.

“FY23 order flow rose 17% YoY for our industrial stocks even ex Siemens’ sizeable Rs245 bn railways order. Including it, growth was 26% YoY. ABB, Siemens, Thermax combined saw 82% YoY order flow and 103% YoY order book growth,” they stated in their June 1 report.

“We maintain our 2023 outlook that operating leverage should surprise and order flow growth remain in double digits, though lower growth YoY,” they added, saying that they have 8 buy calls out of the 10 stocks they track in the sector. Their top picks are L&T, Siemens and Thermax.

Public sector was robust growth thanks to orders from railways but private sector was more subdued with larger orders from the oil and gas companies slowing down, according to the report.

“Private sector side Thermax has mentioned that larger packages in oil & gas has slowed down and reflected in its 34% YoY 4Q order flow decline. However, base orders were up 35% YoY as multiple smaller packages in cement, metals, chemicals, and PLI (Production-linked Incentive) linked projects are being awarded,” the analysts wrote.  “

“L&T saw 3% YoY growth in 4Q but 19% YoY in FY23 skewed overall industrial universe growth to 43%. Voltas, BHEL and Bharat Electronics saw 683%, 445% and 125% YoY growth respectively. Company commentary has pointed to strength in Data Centres, Warehousing/Logistics, Sugar, renewable energy also sustaining,” the analysts added.

L&T’s weaker performance in the engineering and construction (E&C) segment dragged down the average topline and bottomline growth of industrial companies under their coverage to 8 percent YoY and 2 percent YoY respectively.

“Coverage universe saw 8% YoY revenue growth and 2% YoY EBITDA growth in 4QFY23, dragged down by L&T’s weaker E&C performance. ABB, Siemens and Thermax combined saw 35% YoY EBITDA growth on just 21% revenue growth given the 119 bps YoY margin expansion to 11.3%,” they wrote.

Company-specific positives included L&T seeing higher order flows from the Middle East, Siemens benefitting from revenue and margin recovery in power transmission and distribution, and Thermax benefitting from its transition into a company focused on clean energy.