Q4 earnings: Capital goods industry to benefit from govt's infra push

Building on a low base, the domestic capital goods industry is expected to post 20-23 per cent year-on-year (YoY) top line growth in the seasonally strong March quarter (Q4), led by both government infrastructure projects as and private sector investment.
 
Both normalisation and better liquidity are lending support to the sector.
 
“We expect our coverage universe to report 22-49 per cent YoY growth in sales/Ebitda (earnings before interest, depreciation, taxes and amortisation) driven by a low base and a sharp sequential pickup in execution,” analysts at Edelweiss said in a report.
 
Exports of short-cycle products are expected to improve, aiding revenue mix, they add.
 
Aggregate Ebitda should increase 36 per cent YoY on higher operating leverage and the sustenance of some cost rationalisation measures undertaken amid the Covid outbreak, said analysts at Motilal Oswal Securities (MOSL), who expect top line growth of 20 per cent for companies in their universe.
 
New order momentum seems to be holding up in core infra given the government’s focus on infrastructure.
 
“We expect elevated working capital to moderate across the board due to a pickup in execution and better on-ground liquidity,” Edelweiss said.

 
Though top line and Ebitda of the sector are expected to be strong-to-healthy on a YoY basis, brokerages feel earnings could take a sequential hit on higher commodity prices on fixed price contracts.
 
“We expect Thermax to see quarter-on-quarter improvement in sales while Cummins may see marginal [sequential] moderation in exports. We expect gross margins to contract for both in Q4. Higher commodity prices can also impact gross margins of ABB and Siemens,” said analysts at Kotak Institutional Equities in a Q4 earnings preview report.
 
The sector’s bellwether Larsen & Toubro’s (L&T’s) Ebitda could also fall. “About 25 per cent of L&T’s order backlog is from international orders. Strict labour laws and stringent liquidated damages clauses in the tenders can lead to cost overruns. Competitive intensity in the domestic EPC (engineering, procurement and construction) space has led to aggressive pricing. If competition intensifies further, there could be downside to Ebitda margins,” said a CLSA report.
 
Among smaller players, container availability and some site issues may impact KEC International. Its margins are estimated at 9 per cent, a decline of 100 basis points YoY.
 
Meanwhile, brokerages feel the key risk is a Covid-led lockdown. “While another wave is largely a near-term concern that may lead to a longer recovery cycle, we focus on companies with better earnings scalability,” says Edelweiss.
 
Improved cost structures, better liquidity, and infra momentum coupled with exports, normalisation, etc could aid a better cyclical recovery over the medium term, it said.
 
Among monitorables, analysts at MOSL say with execution reaching pre-Covid levels for all companies, the order inflow outlook and working capital levels could set the tone for FY22.