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Published on 12/07/2019 10:23:29 AM | Source: ICICI Securities Ltd

Engineering and Capital Goods Sector - Getting ready to shift gears By ICICI Securities

Posted in Broking Firm Views - Sector Report| #Engineering Sector #Capital Goods Sector #Sector Report #ICICI Securities

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Getting ready to shift gears

With the uncertainty regarding elections behind us, and given the continuation of the same government with a stable mandate, we believe, the infrastructure-related opportunities have got a shot in the arm. There are green shoots in terms of energy efficiency, automation and digitalisation opportunities from private sector. Though the core sector greenfield projects have taken a pause in the near term, brownfield capital expansion from refineries, cement, chemicals and fertilisers will continue. Gradual easing out of the tight liquidity scenario will also be one of the key enablers for pick up in the overall activity under infrastructure space. Due to election-related demand moderation, Q1FY20 execution and order intake is expected to be tepid. However, we believe, going forward, the industry is getting ready to shift gears.

We factor-in revenue growth of 9.9% YoY in Q1FY20 for our coverage universe, led by L&T, Thermax, Siemens, Engineers India, ISGEC and KEC. We estimate PAT growth of 22.5% YoY and EBIDTA margin expansion of 20bps YoY to 10.1%, led by L&T, BHEL, Thermax and Engineers India.

Ordering from PGCIL remains weak and new ordering is expected to be slow both under government and private sector in Q1FY20, however, it will pick up going forward. Our top picks are L&T, Siemens and Kalpataru.

* Slowdown in government spending and overall lull due to elections: The announced order inflow for our coverage universe (ex-L&T) at Rs70bn had witnessed a reduction versus Rs125bn in Q4FY19. There has been a delay in the finalisation of NTPC FGD orders and coal power-related orders impacting the overall domestic order intake.

* Short-cycle base orders to fuel medium-term growth: Energy efficiency-related capex from cement, steel and energy intensive industries in terms of adoption of drives, predictive maintenance and electric motor upgrade, is expected to fuel shortcycle orders.

 

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