Fwd: Engineering & Capital Goods Sector Update; Delusional optimism to reality
Deepak Vaishnav
|
Engineering & Capital Goods |
|
Delusional optimism to reality |
Sinking feeling that scenario is worsening; current environment remains non-conducive for asset creation
¡ High inflation, high BPLR, high commodity prices, indecisiveness, procedural delays, unwillingness, etc appear to be all-pervasive, omnipresent
¡ These factors have surprisingly taken centre-stage for a fairly long duration of time – about 4-5 quarters...
¡ …Resulting in drying out of order announcements, slowdown in execution and decision-making coming to a grinding halt
¡ In a nutshell, catalysts are nowhere in sight, with concerns or risks dominating both capital (Corporate) and financial investments (Investors)
Revisiting our assumptions for FY12E and FY13E earnings forecasts
¡ Have revised order inflow growth assumptions to -3% and +8% (Ex-BHEL) for FY12E and FY13E respectively
¡ Revised order backlog growth to 5% for FY12E and 6% in FY13E
¡ Marginally revised the execution run-rate of order backlog owing to operational and financial challenges
¡ Cut growth in product business to 7% in FY13E, assuming investment spend at 1X GDP growth
¡ Case specific increase in interest rate by 1-2% for FY12E
Ex-BHEL, cutting earnings forecasts by -6% and -11% for FY12E and FY13E
¡ Revenues revised by -3% and -7% for FY12E and FY13E respectively. Highest cuts in Voltas, Blue Star, Mcnally Bharat and TRF
¡ Cut operating margins by 20 bps & 50 bps to 12.8% & 13.0% for FY12E & FY13E. Highest cut - Cummins (-110 bps), Blue Star (-100 bps), Greaves Cotton (-110 bps)
¡ Earnings forecasts revised by -6% and -11% for FY12E and FY13E. Highest cut in Cummins, Voltas, Blue Star, Greaves Cotton and TRF for FY12-13E period
Revisiting valuation methodology- Valuing the ECG sector at 15-year average PER
¡ Earnings CAGR dropping to 7% in FY11-13E period versus 12% in FY09-11 and 42% in FY04-08 period. ROCE to soften from peak of 24% in FY08 to 16.6% in FY13E (Ex-BHEL)
¡ No strong catalysts at play with higher probability of gradual recovery (spanning atleast 3-4 quarters) against immediate recovery.
¡ Erstwhile target valuations were based on average PER of FY04-08 investment cycles. With no strong catalysts in place, FY04-08 valuations remain out of sight
¡ Valuing sector at 15-year average PER with best case upside potential of 15-16%
Change in ratings –Prefer L&T, Thermax, Voltas and Greaves Cotton
¡ Despite all gloom, only silver lining remains healthy ROCE and relatively strong balance sheets
¡ Downgraded L&T, Thermax and Mcnally Bharat by a notch from BUY to ACCUMULATE
¡ Downgraded Cummins and Elecon Engineering by two notches from BUY to HOLD
¡ Prefer companies, where risk or ambiguity is lowest with strong return ratios and valuations being closer to 15-year average PER
¡ Prefer L&T, Thermax, Voltas and Greaves Cotton. Top Avoids- BHEL, Cummins and Blue Star
|
|
Previous Rating |
Revised Rating |
Previous Target Price |
Revised Target Price |
CMP |
Upside/ |
|
BHEL |
Hold |
Hold |
430 |
376 |
326 |
15.2% |
|
L&T |
Buy |
Accumulate |
1936 |
1603 |
1380 |
16.2% |
|
Cummins |
Buy |
Hold |
687 |
388 |
403 |
-3.6% |
|
Thermax |
Buy |
Accumulate |
735 |
495 |
430 |
15.0% |
|
Voltas |
Accumulate |
Accumulate |
165 |
121 |
104 |
17.0% |
|
Blue Star |
Hold |
Hold |
280 |
196 |
221 |
-11.2% |
|
Punj Lloyd |
Hold |
Hold |
76 |
63 |
55 |
14.6% |
|
Greaves Cotton |
Buy |
Buy |
124 |
103 |
90 |
15.0% |
|
TRF |
Hold |
Hold |
390 |
282 |
335 |
-15.8% |
|
McNally Bharat |
Buy |
Accumulate |
201 |
147 |
128 |
15.2% |
|
Elecon Engineering |
Buy |
Hold |
101 |
61 |
71 |
-13.6% |
Regards,
|
Pritesh Chheda |
|
Research Analyst | Emkay Global Financial Services Ltd. | www.emkayglobal.com | Email: pritesh...@emkayglobal.com |
|
Board No. : +91- 22- 6612 1212 | Extn. : 273 | DID : +91-22- 6612 1273 | Mob : +91 98208 07241 |
|
Prerna Jhavar |
|
Research Analyst | Emkay Global Financial Services Ltd. | www.emkayglobal.com | Email : prerna...@emkayglobal.com |
|
Board No. : +91-22-6612 1212 | Extn. : 337 | DID : 6612 1337 | Mob : +91981935 0593 | |
|
|
