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Published on 15/09/2022 2:48:04 PM | Source: Emkay Global Financial Services Ltd

Engineering & Capital Goods, Infrastructure Sector Update : Tendering momentum continues By Emkay Global Financial Services

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Project announcements

* During Q1FY23, new project announcements increased by 30% YoY. Most of these announcements were made by government entities (over 100%). Announcements by the private sector remained largely flat YoY. Consequently, the manufacturing sector witnessed a decline, thus deviating from the trend seen in FY22.

* During FY22, both traditional sectors (steel, cement, petrochemical, and automobiles) and sunrise sectors (electronics, e-vehicles, battery, data center, and solar power) made a number of fresh announcements (up 80% YoY). A large part of the announcements came from the private sector, whose share increased to ~69% in FY22 from ~40% in FY19. Consequently, the manufacturing sector also witnessed significant growth.

Growth in project tenders continues

* The strong tendering activity continues in Q2FY23 as well. Tendering activity grew by 46% YoY during Jul-Aug 2022, at a 15% CAGR over Jul-Aug FY19-23.

* During Apr-Aug 2022, growth stood at 66% YoY (14% CAGR over Apr-Aug FY19-23). Excluding roads, overall growth remained at similar levels.

* The tenders-to-awards conversion rate (ex-roads) stood at 52% in Jul-Aug 2022 vs. 40% in Jul-Aug 2021 and 53% in Jul-Aug 2018. YTD, the ratio for overall/total ex-roads stands at 49%/58%, which is higher than that in Jul-Aug 2021.

Decent growth witnessed in Q2FY23

* Awarding activity, which reported healthy growth in Apr-Jun 2022, witnessed moderation in Jul-Aug 2022 (45% YoY growth). However, on a positive note, ex-roads witnessed higher growth. Water supply and mining also witnessed a strong increase in ordering activity.

Center’s capex momentum continues; All eyes on states going forward

* The center has maintained its strong capex momentum. During Apr-Jul 2022, center’s capex growth stood at 62%/17% YoY. Expenditure by key ministries (Road, Rail, Defense, and Housing) registered 65% YoY growth, with 36% of the budgeted capex carried out in the first four months of FY23.

* Till Jul-2022, capex by states has not seen any significant increase. Hence, all eyes are now set on the quarters ahead. An analysis of the budget data of more than 20 states indicates that capex is expected to grow by ~20% YoY in FY23 vs. FY22RE, although states have missed their budget estimates by ~10%, in general.

Growth in credit to industries at ~13% YoY and that to infra at ~12%

* Credit to industries has steadily increased in FY22, after being flat for a few years. Credit to industries and infrastructure has grown by ~13% and ~12% YoY, respectively. However, in absolute terms, the number remains nearly flat since Feb-22. Credit to industries as a percentage of overall non-food credit still remains extremely low at ~26%. Growth in credit to industries looks encouraging going ahead.

Our view

* We have increased our FY24 and FY25 EPS for LT by 4% and 6%, respectively, to factor in incremental orders in the thermal space. Recent developments in the power sector indicate expectation of thermal ordering in the coming years, with BHEL and LT being the key beneficiaries in our view. We have rolled forward our LT target to Sept’23, with a TP of Rs2,131 with a BUY rating. We also maintain BUY on KEC (TP: Rs495), KPTL (TP: Rs545), and HG Infra (TP: Rs820). Correction in the prices of steel and other base metals would be positive for these companies from a margin perspective. Overall, we maintain our Positive view on the sector, driven by strong order inflow.

 

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