Published on 1/03/2017 3:52:18 PM | Source:  India Nivesh Securities Ltd

Sector Update Capital Goods - India Nivesh Sec

Posted in Broking Firm Views - Sector Report | #Capital Goods Sector #IndiaNivesh Securities Ltd #Sector Report


Sector Review

* EPC companies in the T&D sector continued to enjoy double digit revenue growth with stable margins amidst a steady order inflow position (KEC/Kalpataru). Whereas for the companies involved in the project business, execution continued to be at a cyclical low with diminishing order book position (BHEL/L&T). Order intake for the big players in the project business like BHEL and L&T continued to suffer owing to subdued capex cycle prevailing in the economy.

* Demonetization took a toll on the air‐conditioning industry, which suffered a de‐growth of 11% in volume terms during Q3FY17. As a result Voltas witnessed 4.6% YoY decline in its UCP revenues despite being the market leader with ~22% market share. Though Voltas refrained from any price cuts, it witnessed its peers undertaking aggressive price cuts during the quarter.


Company Review

* Among the companies under our coverage, BHEL’s Q3FY17 operating performance was above our expectations. Q3FY17 revenue grew 18.7% YoY to Rs 63.2bn, while EBITDA margin improved to 3.5% from ‐30.3% YoY, mainly due to 65.2% YoY decline in other expenses. BHEL reported PAT of Rs 935mn against a loss of Rs 10.8bn in Q3FY16 helped by higher margin. BHEL’s order book at the end of Q3FY17 stood at Rs 984bn including orders of ~Rs 16.1bn received during Q3FY17. Out of the above order backlog, ~Rs 550bn are executable orders and Rs 434bn are slow moving orders. the company is expecting that out of its Rs 434bn slow moving orders, around Rs 220bn orders might get revived in next one year and become executable.

* KEC International reported 10.9% YoY decline in revenues at Rs 19.1bn, mainly due to poor performance of the T&D division, as the T&D business got impacted due to demonetisation and delay in conversion of international orders. EBITDA grew 8.8% YoY to Rs 1.8bn, while EBITDA margin expanded 139bps YoY to 9.5% buoyed by improved margin of SAE Towers (500bps YoY expansion) and railway business. PAT grew by 139% YoY to Rs 6.3bn. KEC has a robust and diversified order book of Rs 111.86bn at the end of Q3FY17. Apart from the above, KEC is L1 in orders of around Rs 38bn.

* KPTL’s Q3FY17 standalone revenue grew 28.8% YoY to Rs 11.3bn on strong execution, higher than our estimate of Rs 10.7bn. EBITDA margin expanded 22bps YoY to 10.5% while PAT witnessed 57.4% YoY growth at Rs 571mn. KPTL’s standalone order book at the end of Q3FY17 stood at Rs 83bn. Other than these, KPTL had secured Rs 16.5bn of new orders in the fourth quarter (Q4FY17) till date. Additionally, the company is favourably placed (L1) in orders of over Rs 30bn. With a healthy order backlog and focus on execution KPTL management is confident of achieving 15‐20% revenue growth for over FY17‐19.

* Consolidated revenue of Voltas declined 6.7% YoY to Rs 11.8bn, however due to improved margins in its two segments EMPS and EPS thanks to tighter control on overheads, overall EBITDA grew 58% YoY to Rs 890mn while EBITDA margin expanded 309bps YoY to 7.5% buoyed by improved margin of EMPS and EPS segment. UCP segment was a drag for the quarter due to negative impact of demonetisation. PAT grew by 42.3% YoY to Rs 816mn.

* Engineers India (EIL)’s Q3FY17 standalone revenue declined 11.8% YoY to Rs 3.2bn, due to tepid execution in the turnkey segment. EBITDA margin expanded 1036bps YoY to 24.9% due to higher proportion of consultancy revenues which carry better margin. PAT for the quarter witnessed a healthy 16.3% YoY growth at Rs 850mn. EIL’s order book at the end of Q3FY17 stood at Rs 51bn. In January 2017, EIL got contracts worth Rs 25bn from HPCL for Vizag Refinery. With this order, EIL’s current order book now stands at Rs 76bn, which is 5.1x its FY16 sales, thereby providing strong revenue visibility for more than 5 years.


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