L&T, KEC Int'l: Oil price crash, Covid-19 to hit capital goods companies

The double whammy of pandemic coronavirus (Covid-19) and crash in crude oil prices are expected to hurt businesses of capital good companies with international exposure such as Larsen & Toubro (L&T), KEC International, Thermax, and Engineers India, owing to demand destruction fears.

The sharp slide in crude oil prices of more than 40 per cent to $30/barrel is expected to impact overall orders/awarding from the Middle East and North Africa (MENA) region due to demand destruction fears amid excess supply, according to analysts at ICICI Securities. "The Middle East region contributes nearly 13 per cent to the order book and 14 per cent to consolidated revenues of L&T. KEC International has an exposure of nearly Rs 2,100 crore order book from MENA region, which is 9.5 per cent of order book and 10 per cent to revenue. However, Engineers India had around 25 per cent overseas revenue in FY19 while 54 per cent of 9MFY20 order inflow came in from overseas market," they observe.

Other prominent names that are expected to have a negative impact are Kalpataru Power, AIA Engineering, and Thermax, owing to weak export businesses as global economies are facing a lockdown situation due to the ongoing coronavirus situation. For instance, around 42 per cent of Kalpataru Power’s order book is exposed to international markets while 70 per cent of AIA Engineering’s revenue comes from export markets. Other companies which have substantial dependence on international markets include Elgi Equipment and Thermax.

Edelweiss Securities, too, believes that the two major headwinds have aggravated the risk for the sector as a weaker global economy puts industrial players’ exports at greater risk. "While we expect an overall recovery over two-three years as demand normalises, exports’ recovery may well be underwhelming given an uncertain macroeconomic environment, the weakening outlook for oil prices, and the risks stemming from the COVID-19 outbreak. For projects — both domestic and overseas — the risk of potential execution slippages could hurt earnings for a few quarters if the problem persists," analysts at the brokerage wrote in a report dated March 13.

Things investors should know

Given the uncertainty, brokerages have slashed the earnings estimates and target prices of these companies. For instance, ICICI Securities have cut the target price of L&T by 21 per cent to Rs 1,370 from Rs 1,740 earlier. However, it has maintained 'BUY' rating on the stock. Edelweiss Securities, too, has 'buy' rating on L&T but has revised down the FY20 earnings per share (EPS) by 2.7 per cent to Rs 69.4 from Rs 71.3. Likewise, EPS of FY21 and FY22, has also been slashed to Rs 80 (down 5.4 per cent) and Rs 93.3 (down over 4 per cent), respectively. The brokerage assumes lower order intake for the company for FY21 at 10 per cent (vs 12 per cent). The target price has been set at Rs 1,575 from Rs 1,950 before.

Other stocks which brokerages are bullish on include Siemens India, Kalpataru Power, and KEC International.  ICICI Securities has revised down the target price of KEC to Rs 335 from Rs 415 while Kalpataru Power's targt price now stands at Rs 285 from Rs 570, earlier. The brokerage has 'buy' rating on KEC and 'Hold' on Kalpataru Power.

Siemens India is among the top picks of Edelweiss Securities. The brokerage has 'buy' rating on the stock with the target price of Rs 1,700.