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MOSL: CAPITAL GOODS - Gauging the environment through non-covered companies




Motilal Oswal Securities Ltd.


21 Nov 2013





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CAPITAL GOODS: Gauging the environment through non-covered companies 2QFY14 analysis of 34 companies; Lethargy in decision making impacted execution We have analyzed 2QFY14 for 34 capital goods companies, including for 28 companies outside the MOSL coverage exposed to various segments (compressors, cranes, turbines, pumps, material handling, power transmission, etc). 2QFY14 witnessed delays on the part of the customers in accepting deliveries; and projects completed as per CMIE stood at just INR427b (down25% YoY). We are hopeful of improved execution in 2H. Power products show definite signs of improvement; with covered companies reporting revenue growth of 10.3% and EBIT margins up 151bps in 2QFY14. LT, CRG and KKC remain our top picks. ABB is a strong play on the macro environment. Lethargy in decision making in 1H; hopeful of improved execution India's investment cycle continues to remain impacted by a meaningful demand slowdown across end-user industries. Importantly, 2QFY14 witnessed delays on the part of the customers in terms of accepting deliveries; and projects completed as per CMIE stood at just INR427b (down25% YoY). This is perplexing, and is largely given the increased uncertainty post the sharp volatility in the financial and currency markets. We remain optimistic on the overseas orders and also the pace of execution in 2HFY14, as a degree of stability has returned to the market in terms of those orders which were due for placement and will now come to fruition. Several corporates have also indicated that execution in 2H will be better than 1H. Industrial products margins for covered companies decline 170bp YoY; widening gap remains an area of discomfort For industrial products, covered companies witnessed a contrasting trend with EBIT margins declining 170bp YoY in 2QFY14 to 8.4%; ttm margins stood at 10.7% and are also down 78bp. In comparison, EBIT margins for uncovered companies are showing signs of stabilization with 2QFY14 at 5.8% vs 6% on ttm basis. The gap in margins between covered and non-covered companies had widened meaningfully; and we believe that this continues to be worrying sign. Power products show definite trends of improvement Revenue growth in power products stood at 10.3% for covered companies and 6.6% for the five uncovered companies; and the growth rates have been positive after a gap of nine quarters. Margins show a contrasting trend, with covered companies reporting EBIT margins at 6.7% (up 151bp) also supported by exports; while for uncovered companies, profitability has been eroded with EBIT margins at just 0.2%. While PWGR ordering is likely to plateau; we believe that there exist upside possibilities from i) Green Energy Corridors (INR400b), ii) Intra-state transmission projects and iii) substation automation / electronics including concentrators, FACTS, etc.

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