Challenging time ahead - Industrials - Q4FY20 Results Preview - HDFC Securities

COVID-19 poses multiple headwinds: Industrials companies have been hit hard by COVID-19 pandemic. Execution has started to pick up slowly post almost a month of lockdown. Local Govt approvals are coming slowly as the sector grapples for remobilization of sites. Urban areas are being turned into containment fortresses and it will take time for the works to resume. This will largely impact Metro and Real Estate projects execution. National Highway projects are still executable as they run through interior State districts with limited COVID-19 impact. We believe pure play NH EPC players are best placed to tide through the crisis. Buildings players are worst impacted.

RBI relaxation on payment term a short term breather, more step required: RBI has allowed Banks to give 3months moratorium on term loans and 3months interest deferral on working capital loans. EPC players will lose on fixed costs and interest payments which are most likely not reimbursable. At best companies will get extension of time. Infra developers are going to file arbitration claims for the idle overheads and interest servicing. It will be a long drawn process before a resolution will happen.

Migrant labour and supply chain issues key concerns: Our channel checks suggest about 50-60% labours are at site. Once public transport resumes the labourers will head home. This will reduce execution at site. Labour morale is low and we expect site utilization to ramp up post monsoon in 3QFY21. Cement plants have resumed production but shortage of drivers and transport operators has led to supply demand mismatch. It will take about a month's time to normalize supply chain issues.

Capital goods companies to see weak ordering: We believe both domestic and export investment in infrastructure creation will reduce. With all time low crude price Middle East will cut investment budgets. Global GDP is expected to contract 5% in CY20 this shall further curtail capital goods exports demand. Domestically, with shutdown and lower tax collections, Govt budget will see a shortfall and will result in spending cuts on Infrastructure/Capacity creation. Mega projects like High Speed Rail will take a backseat. Only silver lining is in Highways projects wherein NHAI is gearing to award 4,500- 7,500km of new projects during FY21 vs. 3,300km awarded during FY20.

COVID-19 lockdown would result in 1HFY21 washout and drive sharp cut in our FY21/22E estimates: We have factored in 2months of low levels of execution as site labour availability will reduce once public transport resumes. Site utilization will gradually improve to normalized pre-COVID levels by Sep-20 end. We are building in almost a 3months loss of revenue and with fixed cost getting incurred there would be sharp EPS cuts for FY21E. Execution will also suffer during FY22E as order inflows ex Roads will be weak and with absence of private capex and export orders we may see 15-20% Revenue cuts for FY22E as well. We have cut EPS estimates for FY21/22E across Cap Goods/EPC companies by 12-60% across companies.

Recommendations and stock picks: Outlook on ordering both domestic / international ex roads is likely to be weak. Banks lending will be selective. We have downgraded ABB from ADD to SELL and Siemens from ADD to REDUCE. We have cut PSP/ITD rating from BUY to ADD. We maintain BUY ratings on other coverage stocks. For our coverage universe, we have recalibrated the P/E multiple/EPS estimates lower resulting in TP cuts by 10-60%. In cap goods, LT is our top pick. In the mid cap EPC space, KNR, PNC, HG Infra and Ahluwalia are our top picks.

Source : Equity Bulls

Keywords