Q3 FY21 Earnings Preview
We expect Q3FY21 to be a better quarter as compare to H1FY21, as ordering activity gained traction due to a revival in economic activity. Normalization of supply chain, onsite labour availability, favorable govt. policies & pick up in core sectors like realty are the key driving factors. Overall commentary from management suggests: i) focus on automation/digitalization, i) prudent working capital management, iii) focus on re‐ working cost structure, and iv) improvement in order pipelines in the domestic and international markets. Early signs for private sector capex recovery are now visible, however we believe it would be more of gradual in nature. We believe automation/digitalization would be the focus area for private capex as companies would look to maximize efficiency (to defer capex). We expect ordering from GoI mainly from railways, metros, highways and water projects. On the export front, healthy ordering is expected from the Middle East/Africa/SAARC. Within our coverage universe, we expect Revenues/EBITDA/PAT growth of (excluding L&T) 5.3%/8.3%/3.5% y/y respectively. L&T, Honeywell Automation, AIA Engineering, Bharat Electronics, Engineers India, Mazagon Dock and GRSE are our top picks in the sector.
There is increasing emphasis on indigenization, driven by the recent slogan “Aatmanirbhar Bharat” (self‐dependent India). It will take a multi‐pronged approach, encompassing aspects such as duties, procurement, taxes, SMEs, and technology, etc., over longer run to gain share. India is expected to invest significantly for infrastructure creation over the next few years with governments’ thrust on domestic manufacturing through ‘Make in India’ initiative, the companies with focus on domestic market are in a sweet spot compared to export‐centric companies. Planned Rs102tn National Infrastructure Pipeline (NIP) for India over FY20‐FY25 is a major boost for the sector with focus towards key segments of energy, roads, urban infrastructure, railways and irrigation. The measures announced so far are oriented towards improving the structural growth prospects for the industry and may result in a cyclical uptick in ordering for the capital goods industry. We still await the measures that can address chronic challenges of funding, land acquisition, regulatory clearances and time/cost overruns which would trigger a significant cyclical demand uptick. The companies having healthy balance sheet, strong cash and long‐term scalability throughout disruptions will sail through this challenging phase with potential market share gains
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