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Challenging times; waiting for the tide to turn around
The outlook, in terms of new investments, was subdued even from the government side for Q3FY20 which has been reflected in the weak Rs140bn worth of order announcement by L&T. Overall, we expect the order intake to drop by 37% YoY during Q3FY20 reflecting the macro headwinds. Apart from oil and gas, emission norms, food & beverages and pharma, the overall investment outlook is weak. Government has laid out an ambitious national investment pipeline for the next five years earmarking Rs102tn towards infrastructure development as highlighted in our report dated 1st Jan’20. Mobilising funds for the same is going to be the biggest challenge; however, we believe, the roadmap has been set. Given the challenging scenario, we bet on strong balance sheet companies like L&T, Kalpataru, Engineers India and AIA Engineering. We factor-in revenue growth of 8.1% YoY in Q3FY20 for our coverage universe, led by L&T, KEC and Kalpataru. PBT is expected to marginally decline by 3% YoY impacted by 70bps YoY reduction in EBITDA margin. L&T’s margin is expected to decline by 130 bps as there was some exceptional gain under realty segment during Q3FY19; margin contraction expected from Cummins, Voltas and Engineers India.
* Delay in government orders impact overall ordering growth: There has been a delay in the finalisation of some large infrastructure projects like high speed rail due to change in the Maharashtra state government and overall tight liquidity scenario. Hence, the overall order intake is expected to witness a sharp decline of ~37% YoY to Rs424bn and drop of 30% to Rs171bn excluding L&T.
* Government’s road map for the next five years will ramp-up spending: Finance minister has recently shared the infrastructure investment outlook for the next five years amounting to Rs102tn. Fund mobilisation, land acquisitions and hurdles in terms of state government approvals are key challenges for the same.
* Macro slowdown and tight liquidity impacting short cycle orders: Spending towards efficiency improvement, automation, digitalisation-related operating expenditure arelikely to witness a pause given the overall slowdown especially under auto segment. However, investments in cement, chemicals and hydrocarbons will continue.
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