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Published on 11/04/2020 3:21:04 PM | Source: ICICI Securities Ltd

Engineering and Capital Goods Sector - Growth, the biggest casualty of Covid-19 by ICICI Securities

Posted in Broking Firm Views - Sector Report| #Engineering Sector #Capital Goods Sector #Sector Report #ICICI Securities

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Growth, the biggest casualty of Covid-19

Taking into account the pandemic’s near-term impact on project execution, slowdown in product offtake and shift in the government’s focus towards combating the pandemic, we revise our estimates for companies in the engineering and capital goods sector. We recommend companies with strong balance sheet, short-cycle nature of demand drivers, and technological leadership. The current safety-driven lockdown is expected to impact near-term growth of the companies under our coverage. Though large infrastructure companies like Larsen and Toubro (L&T) have allocated Rs5bn per month towards safety of workers and their families, these can act more as a placebo than a cure given the gravity of the situation. Our top picks are: L&T, Siemens India, and GE Power.

 

* Short-cycle projects, product and technological leaders to spearhead bounce-back: Due to the coronavirus-related impact, demand in H1FY21 is likely to be slow and the impact of this depends on how severely the virus spreads. The lockdown is likely to get extended, wholly or partially, leading to hit on infrastructure projects, functioning of factories and private sector capacity additions. Hence, we believe, in the post lockdown scenario, companies dependent on short-cycle projects and having technological leadership with a product portfolio would lead the bounce-back.

 

* Tough times don’t last, but tough companies do: Turbulent times, payment delays, loss of workers, managing fixed costs, etc. are some of the current challenges facing the sector. We however believe things will normalise and companies with strong balance sheet, business moats and agility towards change will emerge with minimal damage.With this rationale, we place our bets on Siemens India and L&T.

 

* Attractive valuations even for companies with pedigree: Majority of capital goods companies are trading at attractive valuations. This provides an opportunity to buy into companies with strong balance sheet, growth fundamentals, business moats and management pedigree. Due to supply-side disruptions and the pandemic-related lockdown, FY21E earnings stand to be impacted. Hence, in a longer-term normalised perspective, companies trading at deep discount valuation in an FY22E earnings perspective – are the ones we recommend.

 

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