Mid-cap infra, capital goods to fare better

Healthy order flows expected to help firms in these sectors post 5-12% revenue growth

While the outlook for large companies in the capital goods and infrastructure segment (BHEL, L&T) might be on weak footing, prospects appear bright for their mid- and small-cap peers such as KEC International, IRB Infrastructure, Sadbhav Engineering and KNR Constructions. Optimism emanates from a steady pick-up in order awards of government agencies such as the National Highways Authority of India (NHAI) and Power Grid Corporation of India (PGCIL).

Orders awarded by NHAI year-to-date stood at Rs 32,100 crore (up 71 per cent year-on-year or y-o-y), with road projects totaling to 2,733 kms (Rs 33,000 crore of orders) pending at various stages of bidding. PGCIL has awarded orders worth Rs 12,130 crore in this period (up 24 per cent) for power transmission and distribution (T&D) players. Analysts remain positive on road construction and power T&D players even as stock impact on order wins has waned in the past month (three to 10 per cent) for companies such as PNC Infratech, IRB Infrastructure, Gayatri Projects and Kalpataru Power Transmission. Amit Mahawar of Edelweiss Securities says order intake is correlated with earnings per share and expects companies in the engineering, procurement, and construction (EPC) segment to fare better in the third quarter of financial year 2016. “These companies have been benefited from government's capex spends and are not dependent on capex of private companies,” he adds.

Analysts expect companies in the T&D space to report nine to 11 per cent revenue growth while that of road contractors may expand by 12 to 14 per cent in the quarter. Margins too may fare better than last year's due to pick-up in pace of project execution. Competition in the sectors and price cut resorted to by a few players to secure L1 (lowest bid) position may keep the margins in Q3 just in-line with that of September '15 quarter. Nevertheless, interest cost is what the Street would take note of in December '15 earnings.

Teena Virmani of Kotak Securities says profitability of these companies would depend on debt reduction. “Companies which managed to reduce debt would emerge better this earnings season,” she says. Agreeing with her, Mahawar feels working capital cost could continue to be a burden as these companies start servicing larger projects.

Virmani believes the important trigger for these mid-cap stocks would be order inflows and debt reduction plans such as land monetisation, asset sale and securitisation.