Industrials Companies - Q1FY21 Results Preview - Gradual recovery - HDFC Securities

Mr. Parikshit D Kandpal,, Institutional Research Analyst, HDFC Securities.

Industrial Companies (Q1FY21 Results Preview): Gradual recovery

Headwinds receding: Industrial sector has been hit hard more on the supply side on all these fronts: (1) supply of labour (2) materials and (3) clients' sites. The lockdown severely impacted the entire value chain with dislocations in access to client sites. Selfcare has led to labour migrating to home states and large manufacturing facilities have had to comply with COVID-induced lockdown. This has resulted in a complete washout of execution during the first half of 1QFY21. We expect most of the coverage companies to have achieved 40-65% of the normal quarterly turnover.

Urban-centric players to be hit hard: Players with concentrated presence in metros, such as JKIL, ITD, Ahulwalia, Capacite, and PSP, have been hit hard by the sharp fall of labour that these cities have seen due to the COVID-led migration. We pencil in 10-20% normalised execution for these companies during 1QFY21 and a slow rate of recovery toward 3QFY21E.

Reverse migration started, labour availability improved significantly: Our channel checks suggest labour position has improved from 20-60% at the start of 1QFY21 to about 30-80% now. Horizontal projects like roads in interiors are seeing good reverse migration with some players reaching 65-80% labour availability. The building segment is witnessing slower recovery with labour force ramping up from 15% to 30-40% now. As the sentiment had started to improve, the re-imposition of lockdown on and off has impacted reverse migration for urban areas, in particular.

Capital goods ordering to be back ended, EPC ordering has surprised positively: We are seeing a strong bid pipeline for EPC companies. The NHAI has already awarded close to Rs 230bn of new projects FYTD21. Bids worth Rs 70bn are yet to be opened. Of these awards, our coverage universe has been able to bag ~Rs 80-90bn. The NHAI is expected to award Rs 700-800bn worth of projects during FY21E. For larger capital goods companies, short cycle orders may be more back-ended as private capex and large infrastructure project awards may happen towards late 2HFY21. High speed rail seems to be getting revived, which augurs well for L&T, Siemens, and ABB.

Weak 1QFY21 already factored in stock prices: Labour availability issue is the key driver of a large part of our coverage universe reporting likely losses. The loss of execution may result in negative operating leverage and fixed cost absorption on a lower revenue base. Despite cost cuts, the losses may not get fully mitigated. The pain may continue for 2QFY21. We have not factored in one-time costs hit on COVID-led provision on assets owing to limited visibility of the same. Most of the coverage universe is still able to report positive EBIDTA, though interest expenses and depreciation are resulting in reported losses. Despite the losses, moratorium on term loans, WC loans interest deferrals, extended WC limits, release of retention money and easier payment terms will cushion larger liquidity shocks and rating downgrades.

Recommendations and stock picks: From a near to mid-term perspective, the government would drive ordering and private capex/opex will be late cycle recovery. Hence, recovery plays with high government exposure will remain in focus. In capital goods, LT is our top pick. We are adding KPTL as we believe the real estate sector will see mild recovery, which will assuage concerns on its parent Kalpataru. In the mid cap EPC space, KNR, PNC, HG Infra and Ahluwalia are our top picks.

Source : Equity Bulls

Keywords