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Growth in ordering continues in Q2FY24 as well

Ordering momentum for the engineering, cap goods and infra sector (ex. Roads) continued with Apr-Aug 2023 reporting ~40% YoY growth. During the first two months of Q2FY24, growth has accelerated (Q1FY24 YoY growth at ~10%). Power T&D (Smart metering mainly), power equipment, railways, and irrigation drove the growth. For FY23, order inflow stood at ~Rs6.5trn, which was up 90% on a YoY basis and up 21% on a four-year CAGR basis. For FY23, orders excluding roads, were even better at 120% YoY and 23% on a four-year CAGR basis. Power Equipment, Power Distribution, Water, Irrigation, and Mining saw substantially strong growth in FY23.

Some softness on tendering post strong Q1FY24

Project tendering during Apr-Aug 2023 saw 15% YoY growth (ex. Roads stronger at 23%), though it seems to be flattish in Q2FY24 after a strong Q1FY24 (over 30% YoY growth). During FY19-FY23, tendering has seen 11-13% CAGR. There is an extremely strong traction on the railways side currently. The tenders-to-awards conversion rate (ex. Roads) stood at 69% during Apr-Aug 2023. It is important to note that FY23 tendering stood at Rs1,360bn – an all-time annual high.

Project announcements by the government continues, though private saw a lower number of announcements

Fresh project announcements during Apr-Sept 2023 (till September 25, 2023) declined by 15% YoY. While announcements by the government have seen 33% YoY growth, the private sector’s announcements saw a decline of 37% YoY. It is important to note that FY22/FY23 had seen very high growth in project announcements – 86%/80% respectively. While the proportion of manufacturing in the overall announcements had increased from ~30% in FY19 to ~53% in FY23, the same has come down to 28% during Apr-Sept 2023. This remains one of the key parameters to be monitored.

Overall, Center + States + PSUs’ capex growth for FY24E stands at ~20% vs. ~8% in FY23, though elections remain key

The Center has started with flat capex in April-23 over April-22, but data points for the last few years clearly suggest that it would achieve its target. Overall, Center + States + PSUs is expected to see ~20% capex growth for FY24E (assuming typical slippage by the States) as against high single-digit growth for FY23. Elections can have some on the ordering in the latter part of FY24.

Credit growth to industries/infra at ~6%/1.5% YoY in Jul-23

Credit to industries has been near-flat during the last few months with Jul-23 growth at ~6% YoY. Notably, credit growth to the industry ex-infra stands at 8.4% YoY, as there has been decent growth in iron and steel, cement, and petroleum and coal products. Credit to industries (as a percentage of overall non-food credit) stands at ~23% – the lowest in the last 15 years.

Valuations

We maintain HOLD on LT with Sept-24 TP of Rs2,874, based on Avg.+0.5SD (22.5x P/E) for the core EPC business. Value of IT and Finance subsidiaries currently stands at Rs967 (from Rs807 earlier). We maintain our BUY rating on KPP with Sept-24 TP of Rs810, based on 15x P/E (maintain 10-15% valuation discount to KECI). We maintain HOLD on KECI with Sept-24 TP of Rs654. KECI’s Avg./Avg.+1SD during FY11-FY21 stood at ~15x/~20x. We believe the high P/E during the last two years is more to do with the sharp earnings cut (FY23/FY24 EPS cut by 70%/35%). We maintain BUY on HG Infra with Sept-24 TP of Rs1,153. We downgrade ACE to HOLD with a TP of Rs700, based on 24x P/E.

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