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Recovery Awaited, Global Factors At Play
Leading global capital goods manufacturers have partially shut factories amidst Covid-19 led lockdown and weakening demand. Global supply chains are also getting impacted. Our coverage universe of L&T, Siemens and ABB have strong balance sheets and are well placed to endure these tough times. The immediate focus is on (1) Safeguarding employee safety and health (2) Business continuity & (3) Strong focus on cash conservation. The turnaround time to normalcy may be quick in case of EPC players like L&T, as large part of the migrant labor force is still at site and reliance on global supply chain is limited. KEC and Kalpataru Power have large overseas presence with 40/45% ex-India order book. Dependence on India supply chain may impact overseas execution as 80- 90% supply chain resides within India.
Excerpts from the recent announcements by leading Industrials companies
The global commentary from leading Industrials majors viz. Siemens AG, ABB, Bombardier, Cummins, Caterpillar, etc. point to partial/complete shutdown of global factories across countries which have been worst hit by Covid-19. Global demand remains weak and countries are grappling with challenge of flattening Covid-19 curve through lockdown and social distancing. Companies are restraining from giving any forward guidance.
Supply chain moderately stressed
Whilst players like Siemens, ABB etc have global supply chains and factories the demand has shrunk, while the supply chain is also moderately stressed. China Covid-19 impact has started to ebb with opening of manufacturing plants though demand is muted. Players like KEC/Kalpataru have 40/45% overseas order book, execution on which may slow down as large part of their global supply chain originates from India (~70-80%) which is currently under lockdown.
RBI unleashes host of measures, more action awaited
RBI announced multiple steps to arrest large scale defaults and credit rating downgrade for the industrial sector. Whilst it may largely benefit leveraged Infra EPC players, L&T, Siemens and ABB remain insulated. 3-month term loan moratorium, 3-month working capital interest deferrals and more conducive working capital terms are few measures which shall help alleviate liquidity tightness and credit risks on Infra EPC players’ balance sheet.
Short cycle business impacted most, fiscal stimulus awaited
ABB and Siemens have short cycle orders in automotive and machine building segment which may take time to recover even if the Covid-19 lockdown is removed as consumer demand may remain muted. The consumers may have to first repay existing liabilities and then consider more discretionary spending. Project business pending awards may get delayed.
Building earnings sensitivity, aggregate 20.1/39.5% cut in FY21E EPS
Whilst we can’t hazard a guess on extent of Covid-19 lockdown we have build in two scenario FY21E earnings sensitivity. Scenario 1 – one month complete lockdown with another two months time for full recovery and Scenario 2 – two month complete lockdown with another four months for full recovery. We expect partial lifting of lockdown and slow reverse labor migration to sites. Supply chain will also take time to revive. CNBC: once pandemic ends, businesses may take 6months to get up and running normally, says CFO Survey (US). Stay with strong balance sheet companies.
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