| Summary of Contents
| SHAREKHAN SPECIAL Q4FY2012 Capital Goods & Engineering earnings preview Key points -
Q4FY2012 would bring no respite for the capital goods companies as the business environment remains tough and execution of infrastructure projects has yet to pick up. Most of our coverage companies are expected to report a sluggish revenue growth in single digits for Q4FY2012 led by low order booking in the previous quarters and an unfavourable base effect. -
Further, led by competitive margin pressure and a continuous rise in the prices of raw materials like metals, the margins would remain subdued in Q4FY2012. However, as Q4 normally accounts for 35-45% of these companies' yearly sales, some operating leverage is expected which would provide marginal relief from the margin pressure. -
The order inflow announcements in the capital goods space picked up slightly with companies bagging orders worth Rs30,787 crore in Q4FY2012 (excluding NTPC orders the same would have been Rs21,987 crore). Only a few large orders were bagged by the likes of Larsen and Toubro (L&T) and Bharat Heavy Electricals Ltd (BHEL). Though orders for all the expected super-critical equipment were not awarded by NTPC as was expected during the quarter, but some progress was seen with Doosan and JSW Toshiba bagging the first set of orders. A possible rise in the order awarding activities by NTPC and Power Grid Corporation of India Ltd (PGCIL) holds promise in the near term; nonetheless, the same needs to improve if the growth has to be robust from FY2013 onwards. -
In terms of the anticipated Q4 results, L&T and BHEL are expected to outperform in the large-cap space, Thermax and V-Guard Industries (V-Guard) would lead the show in the mid-cap space. Overall, our top picks in this space are L&T and V-Guard and we recommend a Buy on these companies from a long-term perspective. In the budget, there was no progress on the imposition of import duty to curb overseas competition which has continued to mar the sentiments in the domestic companies like BHEL, L&T, BGR Energy Systems (BGR) and Thermax. Outlook and valuation
We expect the sluggish order inflow, margin pressure and subdued future guidance in the face of a slow demand environment and sluggish industry capex cycle to be the recurring tune in Q4FY2012 for most capital goods companies. Hence, the management commentary of these companies on the future growth would be closely watched and could lead to sharp downgrades in earnings estimates.
In the budget, there was no progress on the imposition of import duty to curb overseas competition which has continued to mar the sentiment in the domestic companies like BHEL, L&T, BGR and Thermax. On the positive side, the expected awarding of NTPC's super-critical orders, a cut in interest rates and a pick-up in industrial capex activities remain the key positive triggers for the sector. Our top picks in this space are L&T and V-Guard, and we recommend a Buy on these companies from a long-term perspective.
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