Capital Goods companies on track growth, optimism prevails: IIFL Capital Services

30 Nov 2023 , 11:07 AM

Capital Goods companies maintained optimism on the underlying demand from both domestic markets and exports, even as some delay in domestic order finalisation was seen in Q2FY24. Demand-supply gaps, improved pricing and confidence over sustenance of capex momentum — all have triggered expansion in manufacturing capacities across companies; especially eyeing the latest revival seen in the Power sector. LT, KKC and BHE are analysts of IIFL Capital Services preferred bets on the relative risk-reward trade-offs. 

Growth momentum sustains: 

IIFL CG universe posts healthy 17% revenue growth, while benign commodity prices, operating leverage and conclusion of low-margin legacy orders driving better-than-expected growth of 21/41% YoY in Ebitda/PAT, respectively. While T&D equipment witnessed a smart bounce in demand, multi-bn$ order wins by L&T in Intl Hydrocarbon (ME) drove 58% YoY growth in inflows, even as short-cycle domestic orders growth has started moderating (base effect, global demand softness, channel destocking), as reflected for CG & SIEM and also seen delay in decision making (TMX). Cumulative OB/TTM sales at 2.2x is robust, ensuring healthy visibility for FY25. 

Key hits & misses: 

73% of analysts of IIFL Capital Services coverage reported beat in earnings led by ABB/KKC/TMX, with mix and operating leverage spinning the earnings upgrade. BHE’s cost discipline and mix aided 28% beat, despite revenues slippages. L&T’s 1HFY24 core inflows exuded confidence in capex momentum (domestic + intl) with strong prospects (Rs8.7trn) for the next six to nine months, while its industry-leading NWC reduction stood tall amidst struggling mid-cap EPCs (KECI, KPIL) where finance cost has bloated to 3-4% of sales. Poor visibility of orders from BE for MTAR and for drones for ideaForge were the reasons for disappointments. 

With optimism baked in, upgrades see moderation: 

Earnings upgrade for L&T and TMX (16-17%) was more back-ended for FY26, while that for KKC (4%) and ABB (12%) were for FY24. MTAR saw sharp 25- 35% cut in EPS with weak growth and profitability outlook.