Cap Goods Infra Snapshots: Five lead indicators of a recovery in capex - PhillipCapital

Cap Goods & Infra snapshots - Five lead indicators of a recovery in capex

Our monthly chart book covers more than 100 data points that collectively drive India's capex cycle and hence, revenue growth for the Capital Goods and Infra sectors. Amidst a consensus view that the worst may be over for the sector, we highlight five key data points we track as leading indicators of a potential recovery.

- Rise in new project announcements and project sanctions: New project announcements have dipped 58% YoY in FY13 to Rs4.3trn post a 36% dip in FY12. We note that project announcements continued to decline over the last 4 years after having peaked in FY09 at Rs23trn. In turn, new projects sanctioned by banks shows a similar picture with sanctions down 49% YoY in 9MFY13 at Rs 911bn. For a revival in the capex cycle, we need to witness a sharp improvement in project announcements which in turn, would precede any improvement in the ordering cycle for the capital goods sector.

- Improvement in the working capital cycle: The first indication of any improvement in the end markets for the capital goods sector and subsequent orders for the capital goods sector will be on account of an improvement in the working capital cycle û primarily debtor and inventory. Any improvement in the collection period is an indicator of an improvement in the customerÆs financials and an indication to speed up execution. This would thereafter be followed by new orders coming through for the sector. We note that we still await any improvement on this count; debtor days now at 190 days (>6 months) and inventory days at 43.

- Pick up in IIP which is a leading indicator for stock price performance: Historically, a pick up in IIP (manufacturing production) is a good leading indicator of the BSE Capital Goods index. A rising IIP indicates higher production and capacity utilisation which would lead to increased ordering for the capital goods sector. As long as the IIP data continues to remain weak (+1% in FY13 and 2.3% in April, 13) we do not see a recovery in the capital goods sector.

- Rise in power plant PLFÆs indicating increased fuel availability: We note that coal and gas PLFÆs have declined 900bps and 1800bps respectively, over FY08-13e as fuel supply has not been able to keep up with demand. Lack of fuel has been one of the key reasons for power orders to collapse. Any rise in plant PLFÆs would indicate increased fuel availability and higher utilisation; this in turn incentivizes utilities to develop new plants. We still await a significant improvement in PLFÆs. The recent directive by CCEA allowing a pass through of imported coal prices should lead to plants commissioned post FY09 to improve their PLFÆs to 68% (currently at ~50-55% PLF).

- Bank credit to infrastructure: We are seeing early signs of a pick up in bank lending to infra and real estate projects. Growth in infrastructure lending (+23% YoY) is lead by increased lending to power (+33% YoY) and roads (+17% YoY). Bank lending to the real estate sector has seen a pick up since July, 12 with a 5% YoY growth in April, 13.

Valuation and Picks

Our view remains that the capex cycle in India remains in the doldrums and a recovery is still no where in sight. To its credit, the government is trying to address issues on fuel, land and environment clearances but there is still some way to go before we see any meaningful impact of the same. Our top picks in the sector are VA Tech Wabag, L&T and Thermax in that order.

Source : Equity Bulls

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