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Capital Goods Businesses Gaining Momentum Sector Update Capital Goods Businesses gaining momentum Sector Update A gradual return to normalcy, steady momentum in business, stabilising supply chain, improving Q4FY2021 Results Preview pace of government tendering in core infrastructure and defence sectors are factors that bode well for the capital goods sector. For project-based companies, execution has resumed at most Sector Capital goods sites with near normal operations. With an improvement in execution and production q-o-q for project-based companies, we expect revenues improve by 11% y-o-y and 30.2% q-o-q led by Sector View: Positive improvement in execution and production. Further, cost control and curtailment of discretionary spending by management and positive operating leverage will marginally negate the impact of higher commodity prices, containing the decline in EBITDA margin at ~18 bps y-o-y for Q4FY2021 for project-based companies leading to higher net earnings growth (18.5% y-o-y). Improving liquidity, with improvement in government receipts and focus towards infrastructure Coverage Universe spend and receding of supply chain issues augur well for the sector from the medium to long CMP term perspective. Consumer goods/electrical-based companies continue to witness sustained Companies Reco. PT (Rs) (Rs) demand despite price hikes. Demand is further expected to accelerate due to the sustained growth seen in Tier-II and Tier –III cities. Due to higher commodity prices and supply chain Amber 3,172 Buy 3,716 Technologies challenges, unorganized players continue to struggle helping organized players. With the expectation of hot summers leading to strong demand across room ACs, coolers, refrigerators Bharat 131 Buy 190 and gradual recovery in construction helping B2B and retail segment for cables and wires Electronics companies, we expect revenues to improve by 36.4% y-o-y and cost control undertaken with Blue Star 912 Buy 1,200 price increases marginally offsetting commodity headwinds leading to 63bps improvement in margins. With operations gradually resuming, we expect the utilization levels as well as Carborundum 500 Buy 611 efficiencies at project sites to improve further. The ordering momentum is expected to pick-up Universal driven by spending from government while private capex gradually picking across cement, Cummins India 878 Buy 1,030 steel, healthcare. Further, the industry has witnessed better than expected recovery in demand Dixon 3,482 Buy 3,750 led by rural India and small towns, which remains encouraging for consumer durables/ Technologies electrical companies and expectation of strong summers with rising temperatures bodes well for consumer durable companies for the upcoming quarter too. Key monitorables are outlook Finolex cables 374 Buy 475 on ordering activity/execution, initiatives taken to address the pressure on margins, intensity Honeywell 44,606 Buy 56,265 of working capital for project-based companies and demand across consumer durables/ Automation electricals companies. However, near term business performance could remain volatile given India the resurgence of COVID-19. We prefer industry leaders having a strong diversified order book, execution capabilities and healthy balance sheet for project-based companies. In the JMC Projects 82 Buy 95 consumer durables segment, we prefer companies with a strong cash flow position and better KEC 439 Buy 505 working capital management. Hence, for project-based companies, we prefer L&T, Honeywell International Automation India, Carborundum Universal, Cummins India, Ratnamani Metals, Kirloskar Oil KEI Industries 515 Buy 645 Engines, Bharat Electronics and KEC, while among consumer durable companies, we prefer Blue Star, Polycab, Dixon Technologies, Amber Enterprises, and KEI Industries. Kalpataru 378 Buy 485 Power Outlook L&T 1,401 Buy 1,795 Improving business environment: A gradual return to normalcy, steady momentum in business, stabilising supply chain and the improving pace of government tendering in core infrastructure and Polycab India 1,380 Buy 1,530 defence sectors bode well for the capital goods sector. Moreover, after resumption of economic Ratnamani 2,026 Buy UR activity, the industry has witnessed better-than-expected recovery in demand and a pick-up in Metals construction activity led by rural India and small towns coupled with expectation of hot summers bodes well for consumer durable/electrical sector. The ordering momentum is expected to pick up Thermax 1,275 Hold 1,350 further (as seen in Q3FY21) driven by spending from government and further thrust on infrastructure Triveni Turbines 100 Buy 105 and defence in the upcoming budget will boost sector momentum. Further, the industry has witnessed a better-than-expected recovery in demand led by rural India and small towns, which remains V-Guard 245 Buy 311 encouraging for consumer durables/ electrical companies with sustainable demand across summer Kirloskar Oil 155 Posi- 192 products and pick up in construction activity bodes well for consumer durables/ electric sector. Engines tive Further opportunities arising from PLI scheme with a strong thrust from government expediting the Source: Company, Sharekhan Research process brightens the sector outlook. However, near term business performance could remain volatile given the resurgence of COVID-19. Our Call Valuation: Prefer companies with inherent abilities to strive during turbulent times: With execution momentum gradually gaining pace with improving utilisation levels and better availability of labour, we expect companies with diversified businesses, higher service revenue, and product basket catering to operating expenditure spends to see a pickup. In the consumer Price chart durables/electrical segment, with improving demand and supply chain normalisation, we prefer companies with strong cash flows and better working capital management, which are better 140 120 prepared to revive their earnings growth trajectory as normalcy prevails. Hence, among project- 100 based companies, we prefer L&T, Honeywell Automation India, Carborundum Universal, Cummins 80 India, Ratnamani Metals, Kirloskar Oil Engines, Bharat Electronics and KEC, while among consumer 60 durable companies, we prefer Blue Star, Polycab, Dixon Technologies, Amber Enterprises, and KEI 40 Industries 20 20 21 20 20 - - - - - Key risks: Jul Jan Jan - Oct Apr - - - - Weak domestic macroeconomic environment leading to feeble project tendering and higher 06 06 06 06 06 commodity prices affecting OPM. Sensex BSE Capital Goods Leaders: Amber Enterprises, Blue Star, Dixon Technologies, Honeywell Automation India Source: NSE India, Sharekhan Research Laggards: KEC international, Ratnamani Metals, Finolex Cables Preferred Picks: L&T, Honeywell Automation India, Carborundum Universal, Cummins India, Ratnamani Metals, Kirloskar Oil Engines, Bharat Electronics, KEC, Blue Star, Polycab, Dixon Technologies, Amber Enterprises, and KEI Industries. April 06, 2021 12 Sector Update Q4FY2021 results estimates Revenue (Rs. cr) OPM (%) Net profit (Rs. cr) Company Q4 Q4 y-o-y q-o-q Q4 Q4 y-o-q q-o-q Q4 Q4 Y-o-Y QoQ FY21 FY20 (%) (%) FY21 FY20 (bps) (bps) FY21 FY20 growth growth (%) (%) Amber 1,718 1,315 30.6 - 8.9 7.7 114 65 88 63 40.7 - Technologies Bharat Electronics 6,482 5,817 11.4 104.9 23.9 25.7 (182) 498 1,144 1,047 9.3 - Blue Star 1,489 1,299 14.6 32.5 7.3 2.9 441 3 63 9 - 71.6 Carborundum 656 594 10.4 -10.6 11.9 17.3 (535) (579) 53 92 -42.7 -39.6 Universal Cummins India* 1,283 1,053 21.9 -9.9 13.4 6.3 709 (355) 153 122 25.2 -34.7 Dixon Technologies 1,874 857 118.6 -14.1 4.0 6.5 (250) (59) 49 28 78.0 -20.3 Finolex Cables* 725 651 11.3 -12.7 13.6 13.4 26 79 101 117 -13.7 22.2 Honeywell 973 704 38.2 11.3 20.5 18.3 229 (97) 163 111 46.9 8.8 Automation India JMC Projects 1,345 939 43.2 26.1 9.1 11.3 (226) 11 39 45 -13.5 51.8 KEC International 4,046 3,671 10.2 23.0 8.8 10.1 (132) (31) 188 193 -2.5 29.6 KEI Industries* 1,284 1,259 2.0 11.3 10.8 9.6 122 (32) 83 61 36.6 4.4 Kalpataru Power* 2,670 2,303 15.9 34.0 10.9 11.0 (6) 54 155 107 44.8 50.4 L&T 47,692 44,245 7.8 34.0 11.4 11.6 (18) (63) 3661 3065 -17.9 16.2 Polycab India 3,035 2,129 42.6 8.5 13.3 14.1 (86) (17) 295 214 37.6 12.2 Ratnamani Metals 511 629 -18.8 16.1 16.5 15.3 125 (164) 59 67 -12.4 -2.0 Thermax 1,515 1,323 14.5 7.4 9.6 4.8 481 (85) 96 39 - -14.0 Triveni Turbines 200 154 29.9 15.2 21.8 11.6 1,018 183 41 14 - 47.4 V-Guard* 849 537 58.3 2.7 13.4 8.4 496 (35) 89 33 - 15.9 Soft Coverage Kirloskar Oil 867 711 22.1 8.7 9.0 9.5 (52) (282) 48 47 3.5 -20.4 Engines AIA Engineering 844 857 -1.6 20.7 21.0 21.6 (55) (365) 122 142 -13.5 -23.0 Total 80,059 71,048 12.7 30.5 12.3 12.4 (15) 58 6691 5614 19.2 50.6 Total (excl. L&T 25,885 20,986 23.3 14.6 11.0 10.5 45 (18) 1885 1,503 25.4 5.3 and BEL) Source: Company, Sharekhan Research, *Standalone financials Valuations Price EPS PE Company CMP (Rs) Target Reco (Rs) FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E Amber Technologies 3,172 3,716 Buy 50.4 16.0 41.9 72.9 62.9 198.2 75.7 43.5 Bharat Electronics 131 190 Buy 7.5 7.7 8.4 9.5 17.5 17.0 15.6 13.8 Blue Star 912 1,200 Buy 15.3 9.7 21.4 28.5 59.6 94.0 42.6 32.0 Carborundum Universal 500 611 Buy 14.4 13.1 16.1 18.5 34.7 38.2 31.1 27.0 Cummins India 878 1,030 Buy 23.2 19.2 21.9 25.5 37.9 45.8 40.1 34.4 Dixon Technologies 3,482 3,750 Buy 103.0 129.2 232.8 340.0 33.8 27.0 15.0 10.2 Finolex cables* 374 475 Buy 26.3 16.8 23.4 27.9 14.2 22.3 16.0 13.4 Honeywell Automation 44,606 56,265 Buy 556.0 564.8 702.0 852.5 80.2 79.0 63.5 52.3 JMC Projects* 82 95 Buy 9.4 3.8 8.2 10.6 8.7 21.5 9.9 7.7 KEC International 439
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