Industrials Q3FY21 Results Preview - Normalisation done, growth awaited - HDFC Securities

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

Tailwinds in favor: Industrials sector has returned to pre-covid normalcy with labour availability crossing previous highs. This along with the robust Central/State Government ordering has done heavy lifting for the order book. Ordering has been well diversified across Metro, Water, Railways, Roads, T&D, Buildings and Mega projects like High Speed Rail. We believe that the growth tailwinds are in favor for the sector. Whilst the cost cutting measures have largely got reversed, but this has been achieved with pruning of excesses and some of the benefits may get retained. Interest rates remain at all time low and shall aid in interest cost savings. Asset monetization is picking pace with interest returning for Toll/HAM projects. Increase in crude prices, commodity prices will have some impact but these are still under control and well covered under the contractual inflation provisions.

Labour availability has crossed previous highs, asset monetization to pick pace: Our coverage universe has crossed pre-covid labour and execution is gradually normalizing, though social distancing norm is still impacting overall throughput. Strong toll traffic recovery and growth pickup has resulted in buyers coming back to the negotiation table. We expect Ashoka Buildcon and Dilip Buildcon to conclude Asset monetization during 4QFY21. Our channel checks suggest strong buying interest for incoming producing assets from global sovereign funds. The asset monetization will lead to valuation re-rating. Pickup in real estate sector may benefit players with real estate assets viz. L&T and NCC. These may see accelerated monetization through launches (in case of L&T) or land sales (in case of NCC).

All round ordering to benefit capital goods companies: In our coverage history we have never seen such ordering which happened during FYTD21. We are hearing positive news flows on various Industries running out on capacity utilization and announcing capex programs. Mega projects like High-speed rail have become reality, refinery projects got tendered. Roads, Metro, Water, T&D, and Buildings etc are firing. This augurs well for L&T, Siemens, Cummins and ABB. Overall utilization peaking out and recovery in Auto, Pharma, F&B etc augurs well for automation capital goods companies.

Large part of the coverage universe to report growth YoY: We expect most of the coverage universe to report a YoY growth in revenue/PAT as execution has normalized. Collection efficiency remains under control barring a few states where state governments are awaiting payment of GST dues. Central agencies payment remains on track, and hence NWC is expected to remain stable. Debt may also remain stable.

Re-rating to continue as new wins move into execution, tax collections stabilization, budget boost to benefit sector: Government finances are improving with opening up of economy. GST collections have improved. Budget talks of likely setting of low cost Infra Development Finance institution shall ease funding concerns. Infra companies are sitting on decade-high order books, decade-low debt, decade-best NWC and decade-low valuation (~6.2x on FY23E Core EPC EPS). This sets the tone for re-rating once growth recovery pans out.

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. In the mid-cap space, NCC, ITD, PNC, KPTL, KNR, HG Infra, Ahluwalia and Capacite are our top picks.

Source : Equity Bulls

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