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Sailing through rough waters
I-Sec capital goods coverage universe witnessed 2% YoY revenue growth in Q3FY20. Excluding L&T, overall growth declined 2% YoY. Slowdown in global trade and escalation of domestic liquidity-related issues resulted in 6.7% YoY decline in order intake to Rs647bn. However, excluding L&T (where order intake growth was led by overseas business), order intake declined 14.7% YoY to Rs231bn. Green energy corridor, metro, railways and flue gas de-sulphurisation (FGD) are among the areas where ordering is robust. Given the overall slowdown, we bet on companies with strong balance sheet, growth tailwinds and multiple growth levers. Top picks are: Larsen and Toubro, Engineers India, Siemens, and GE Power India.
* Gloom under domestic investments continues… The slowdown in headline macro indicators was reflected in the Q3FY20 performance of capital goods companies. Escalation of the tight liquidity situation impacted private sector capex and over-spending by the government. New order generation was muted and higher competition has resulted in competitive pricing. Auto segment slowdown has also impacted automation and short-cycle orders. The extent of impact of coronavirus epidemic is yet to be gauged, but import-dependant sectors like solar, room ACs, etc. can be early casualties if the situation worsens.
* …..but selective green shoots are visible: Emission norms related ordering from power sector in terms of FGD, metro, railways, food & beverages and pharma are among the sectors where investments are healthy. Reduction in commodity prices due to slowdown in China can support overall gross margins of companies.
* Government investments to crank-up demand: Metro projects, refinery expansion, petrochemical investments, railways, expressways, green energy corridors, etc. are segments witnessing investment thrust from government
* Upgrades/Downgrades: We upgraded Siemens to BUY, downgraded Blue Star and Thermax to REDUCE, and Techno Electric to ADD.
* Key risks: Continuation of tight-liquidity situation, pause in government outlays, and non-revival of demand under consumption and auto – are the key risks to our call.
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