PL Sector Report: Capital Goods - Jul-Sep’23 Earnings Preview – Healthy outlook; margin revival visible

Capital Goods - Amit Anwani - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Jul-Sep’23 Earnings Preview – Healthy outlook; margin revival visible

We expect our capital goods coverage universe to report healthy performance in Q2FY24 owing to 1) strong opening order books, 2) continued execution momentum, 3) favorable product mix and 4) better demand/orders/volumes from domestic as well as key export markets such as Middle East (ME), Americas, SAARC, Africa etc. Overall, we expect Revenue/Adj. PAT growth of ~16.8%/26.5% YoY (15.4%/33.7% YoY ex-L&T). Key monitorables would be margin guidance, demand outlook, order/ inquiries pipeline and working capital management. Our top picks are Siemens, L&T, APAR, ABB and BEL.

Order inflows (OI) likely to be strong in Q2FY24, owing to substantial order wins announced by companies like BEL/L&T/KEC/KPP across segments like T&D, water, hydrocarbon, railways, defence, digitalization, energy efficiency etc. along with uptick in private capex. During the quarter, L&T’s announced OI stands in range of Rs245-445bn, while T&D EPC companies such as KEC/ Kalpataru announced robust OI worth ~Rs32bn/~Rs33bn respectively. BEL announced orders worth ~Rs62.9bn. Going forward inquiries/tendering activities are expected to remain healthy from sectors such as T&D, railways, Data center, Defence etc. in domestic & key exports market like Middle East, USA, SAARC etc.

Product/consumables companies’ revenue to grow by ~17.6% YoY, led by decent volume growth in domestic market and continued traction from export markets. EBITDA margins for most product companies are likely to expand on back of favorable product mix and normalizing freight & commodity cost. Within product companies, we expect Industrial consumable to report ~12.8% YoY growth, (CUMI- ~13.4% YoY & GWN- ~11.6% YoY) mainly driven by strong growth in ceramics business and continued strong demand across key industrial sectors.

EPC companies revenue to grow ~16.5% YoY led by healthy execution and opening order book, while EBITDA margins likely to gradually pickup with increasing execution of newer order amid stable commodity prices.

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