After carefully studying the current trends in India’s industrial sector, UBS initiated the coverage of five top players in the segment. Siemens, Larsen and Toubro (L&T) and Bharat Electronics were initiated with a "buy" call, ABB India with a "hold" rating and Cummins India with a "sell" rating.
UBS analysts expect new emerging drivers of capital expenditure (capex) to reduce the cyclical volatility of top and bottom-line growth for a few companies. Defence, electrification, and industrial automation (IA) are areas in the Indian industrial scene that can surpass manufacturing capex with combined revenues of more than $75 billion by FY30.
UBS sees an outperformance of long-cycle firms over pure product names.
“We see a convincing case for domestically focused long-cycle (larger execution cycles) industrial leaders posting better new order growth, a key driver for industrial earnings/valuations with large pipelines,” observed UBS.
Pluses and minuses
Siemens is UBS’s top pick, given its potential to generate high-double-digit returns and new-order CAGR. Moreover, the growth prospects of the Total Addressable Market (TAM) is also strong. Again, evolving service/export-led business model is another upside to Siemens’ prospects, which UBS thinks has not been priced into the stock yet, thus creating significant room for stock appreciation. UBS set the target price for Siemens at Rs 3,900.
In the order of preference, Siemens is followed by Larsen and Toubro (L&T) with a target price of Rs 2,770 and Bharat Electronics with a target price of Rs 125.
“Firms at the top of the value chain across these segments (defense, electrification and IA) that have scalable technology platforms, expansive product suites, greater TAM shares (Siemens, L&T and Bharat Electronics) and robust execution track records may materially outgrow industry peers,” read the research report.
When it comes to India’s leading IA and power product provider ABB, UBS prefers to be on the sidelines. Besides having a strong brand and a diversified product portfolio, which are major long-term growth drivers, ABB is also well-poised to gain from the government’s attention on infrastructure development and rising proliferation of renewable energy.
However, supply chain disruptions and resulting delays in projects are a damper to the prospects. Moreover, the financial stress of high debt levels that roil the Indian power sector is another concern for ABB, which carries a target price of Rs 3,600.
Indian power technology company Cummins is the least preferred in the list of five names. Among many concerns, UBS highlighted the valuation as expensive compared to peers. UBS attached a target price of Rs 1,250 to Cummins, which reflects a nearly 21 percent downside to the share price on February 21.
Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
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