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Strong order book bodes well for future

This report highlights the performance of ~35 companies in the Capital Goods, Infrastructure and Defense sectors and shows where they stand presently compared to preCovid times. We have looked into sales/PAT growth, gross margin, EBITDA margin and net profit margin expansion/contraction on a YoY/2-year CAGR basis (FY22 over FY21 and FY20). The report also highlights order book growth and future tendering prospects. Sales/PAT growth: While YoY sales growth was 17% for these companies, the 2-year CAGR stood at 4%, implying marginally higher FY22 sales vs. FY20. YoY, PAT increased by 21%, but the 2-year PAT CAGR was ~12%.

* On the sales front, Defense/Infrastructure companies (2-year sales CAGR of ~6-8%) fared better than Capital Goods companies (2%). HG Infra (28%), KNR (21%), JMC (20%), ACE (19%), GR Infra (15%), PNC (14% and Carborundum (13%) showed strong execution, while IRB (-19%), Capacite (-7%), KPP/BDL/Cochin/ISGEC were still well below their respective FY20 sales.

* At the PAT level, Defense companies saw a 2-year CAGR of 21%, while Capital Goods firms saw 14% growth over FY20 profitability. Infrastructure firms saw a negative 2-year CAGR of 6% due to the poor performance of Dilip Buildcon (excluding Dilip, it would have been 1% growth) and lower margins across several of the Infrastructure companies.

GM/EBITAM/NPM: High commodity prices negatively affected margins across various companies in the three sub-sectors. Gross margin was down 70bps YoY (2-yr negative 123bps) for the universe. However, with strict cost control on staff and other expenses, EBITDAM was only down by 65bps on a 2-year basis. NPM was up by 58bps in this period.

* Infrastructure/Capital Goods segments were the most affected by high commodity prices – 280bps/160bps gross margin contraction on a 2-year basis, while companies in the Defense space were able to manage better with a 92bps expansion.

* Defense companies posted a positive EBITDAM over 2-year basis (43bps). Capital Goods companies saw a marginal decline in EBITDAM (29bps on a 2-year basis) as these companies managed staff and other expenses well. Infrastructure companies saw 182bps EBITDAM contraction, and hence the worst among the lot.

Order book: ~12%; 2-year CAGR

* As of FY22-end, the companies saw a 2-year CAGR of ~12% in the order book. Defense/Infrastructure companies saw a 23%/15% rise (2-year CAGR) in their order book. Order book growth for Capital Goods companies stood at 7%

* JMC Projects (34%), KNR (31%), PNC (30%), Thermax (30%) and HAL (25%) were the clear winners in terms of order book growth from a 2-year CAGR perspective, while IRB, NCC, Ashoka, Apar and Triveni Turbine fared well. The laggards were Mishra Dhatu, Cochin, Capacite and GR Infra

Awarding and Tendering: Strong tender pipeline, but awards lagging

* In FY22, tenders for all sectors/all sectors ex-Roads saw 15%/25% YoY growth, while awards witnessed only 3% YoY growth across all sectors; awards, ex-roads, declined by 10% YoY.

Top picks from Emkay coverage

* L&T(TP:Rs 2,160), KEC(TP:Rs 495), KPTL(TP:Rs 500) and HG Infra (TP:Rs 820) are our top picks (Buy) in the sector. LT, ex-services, trades at 16.5x FY24E EPS, assuming CMP (with 20% discount) for all the listed IT and finance subsidiaries. Short-cycle engineering companies such as Siemens, ABB and Cummins have shown strong revenue momentum in the recent past.

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