Capital Goods Stocks Outlook for the week (25-29.06.2012)

[rupeedesk]

Capital Goods Stocks Outlook for the week (25-29.06.2012)

Stocks of capital goods and engineering companies are expected to be choppy most of next week ahead of the rollover to the July series on Thursday, and also due to the slackness in policies to spur growth in investments. In the near term, the outlook is negative on these counters. So, there could be some weak rollover to the July series. The Reserve Bank of India policy review has also been a dampener. We are seeing no incipient signs of revival in industrial capital expenditure plans. Some companies felt that even if the RBI had cut rates by 25-50 basis points, it would have not made any material impact on industrial capex decisions. Our forecast of 11% revenue decline for Thermax in FY13 (2012-13 Apr-Mar) might prove optimistic, despite indications that 1QFY13 order inflows would be strong.

Segment leader Larsen & Toubro Ltd is also pinning its hope on overseas orders to achieving its guidance. The (L&T) management has reiterated its guidance for a 15-20% growth in orders in FY13 and this would be driven by growth in overseas orders. The company is targeting a 35% growth in exports (post a 59% growth in FY12) and a 9-10% growth in domestic orders to meet its 15-20% overall order growth in FY13. However, It has a positive view on the counter after a private consortium of L&T, HCL Infosystems and Tata Power have been chosen to bid for developing a 100-bln-rupee backbone communications network for the defence ministry. This event could, therefore, open up a new window of opportunity for L&T, besides setting a trend for increased private participation in supply of defence equipment. But,  Bharat Heavy Electricals Ltd counter as weak due to a huge risk of underutilisation for the company owing to limited order pipeline. It also remained concerned on BHEL's profitability for industrial business given limited business pipeline and sustained pricing pressure.  Do not foresee any material contribution from the non-thermal revenue base (power transmission and distribution, locomotives, oil & gas products, etc) over the next 2-3 years. However, feels imposition of import duty on mega and ultra mega power projects could substantially reduce the Chinese presence in India, which in the last 2-3 years.