Q1FY21 will likely be a forgettable quarter
* Q1FY21 may turn out to be a forgettable quarter for the Engineering & Capital Goods sector as the lockdown has severely impacted execution for over two months for several companies in the sector. While factories and construction work resumed in several states mid-April onwards, lower demand and workforce challenges led to little execution. We expect revenues to decline 38% yoy for our coverage universe. Excluding L&T, the revenue decline is expected to be even worse at 45% yoy. L&T, KEC, KPP and Concor are expected to see a lower impact on revenue as parts of their business were active and hence, helped moderate the overall revenue decline.
* EBITDA margin for our coverage universe is expected to contract by ~860bps yoy. Ex-L&T, we expect margins to fall 1440bps, mostly due to negative effects of operating leverage amid falling revenues.
* We estimate only Concor to report a net profit during the quarter, while the rest of the sector will likely post a loss.
* The key thing to watch out for is working capital for the sector as a whole. Also, watch out for management commentary on order outlook and execution revival, among other things.
* L&T, Cummins India, Concor and KNR are our key picks in the sector.
* We expect L&T to report a 32% decline in revenues due to operational disruptions in the E&C segment. We expect a relatively lower impact in its services business, which helps cushion the overall revenue decline. Margins and working capital are also likely to deteriorate on lower resource utilization and difficulty in receivable collection. Announced order inflows for Q1FY21 are about RS150bn and we estimate Rs213bn of total order inflows during the quarter, including service revenues.
* We expect Cummins India to report a 66% decline in revenue led by a 68% and 60% fall in domestic and exports revenues, respectively. Similarly, for ABB and Siemens, we expect a 60-70% drop in revenue during the quarter.
* Within the T&D EPC space, we estimate Kalpataru to report a 32.5% revenue fall, while KEC may post a 23% decline. Despite opening up of several work sites for KEC and KPP, labor and equipment shortage due to logistical challenges may have impeded work, in our view.
* We are UW on L&T, Cummins, ABB, Siemens and Thermax, while EW on BHEL and OW on KEC and KNRC in our sector EAP.
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