Rise in India Inc's capex expected to drive profit growth.
After a flattish trend in capital expenditure over two years, India Inc is set to see a sizeable jump in investments towards creating new capacities. According to the Centre for Monitoring Indian Economy's (CMIE's) Capex database, new project announcements for the quarter ended June stood at Rs 5.8 lakh crore - 66 per cent higher than the average fresh investment of Rs 3.5 lakh crore per quarter in the preceding four quarters.
"This is a good indication that investments continue to soar and corporate confidence is very strong. There is strong recovery in the industrial capex and electricity, which accounts for almost a third of total investments," says CMIE MD & CEO Mahesh Vyas.
| HOW THEY STACK UP | ||||
| In Rs Crore | CMP (Rs) | PE (x) | Order book | OB/ Sales |
| ABB | 803 | 71.6 | 8,500 | 1.4 |
| Areva T&D | 287 | 54.4 | 5,111 | 1.4 |
| BHEL | 2,453 | 26.6 | 148,000 | 4.4 |
| Blue Star | 436 | 18.9 | 1,976 | 0.7 |
| Crompton | 277 | 19.9 | 6,800 | 0.7 |
| L&T | 1,812 | 31.8 | 107,860 | 2.9 |
| Suzlon | 57 | -10.2 | 18,400 | 0.9 |
| Thermax | 756 | 55.9 | 6,984 | 2.1 |
| Voltas | 210 | 17.4 | 5,000 | 1.0 |
| Consolidated numbers for Crompton Greaves, Suzlon, Voltas OB is order book Source: Capitaline, analyst reports | ||||
Even on a yearly basis, India Inc is estimated to incur capital expenditure of about Rs 6 lakh crore in 2010-11, the highest in the last five years. Even on a yearly basis, India Inc is estimated to incur capital expenditure of about Rs 6 lakh crore in 2010-11, the highest in last five years and reasonably higher compared to the last two fiscal years when it stagnated around Rs 4.6 lakh crore levels.
That the capex cycle has already begun can be gauged from the sharp rise in India's capital goods index (indicates trend in output of heavy machinery and equipment). Although the low-base effect has helped, in the current year (till May), the average monthly growth in the index at 46 per cent has been impressive. The beneficiaries of this increase in investments believe analysts will be the engineering and capital goods companies. "We are expecting the sector to do well in the second half of 2010-11 and in 2011-12 as well, led by higher orders and improved execution. Execution will speed up and even new orders will pick up due to the closure of the 11th Five-Year Plan in the second half of 2010-11. The government (companies and departments) could rush to announce new orders as they are supposed to achieve the milestones or targets," says Nidhi Agarwal, who tracks capital goods sector at Sharekhan. In this back drop of a strong pipeline of investments, we look at the engineering and capital goods companies that are expected to do well:
BHEL: Thanks to its leadership and strong capex in the power equipment space, BHEL has the highest revenue visibility with an order book of Rs 1,48,000 crore, which is over four times its trailing 12-month sales. With an enhanced capacity and strong order book, its earnings are expected to grow about 25 per cent annually over the next two years. BHEL, a good play on the power sector capex, is trading at a reasonable 15 times its 2011-12 estimated earnings and can deliver healthy returns from a two-three year perspective.
Crompton Greaves: A well-diversified company with good execution and technical capabilities, Crompton Greaves is a good investment in the transmission and distribution (T&D) space. Although its exposure to European markets may prove to be an overhang (in near-term) on its stock, the company is looking at larger markets like the US to grow and further diversify its revenues. Meanwhile, the huge opportunities in the domestic T&D space and Crompton's ongoing expansion across different verticals should help deliver 15 per cent earnings growth.
L&T: Considering its well-diversified revenue mix and strong execution and technical capabilities, L&T is considered to be the closest proxy to play on the upturn in the capex cycle. The company has strong revenue visibility with its order book of over Rs 1,00,000 crore (about three times its trailing revenues). The company is further scaling up its businesses, like power equipment, defence, shipbuilding and other infrastructure-related sectors. Its earnings are expected to grow at 22-24 per cent annually over the next two years. Analysts value the stock at about Rs 1,900 and believe that an investment with a one-three year perspective should yield good returns.
Other key beneficiaries: Among other companies, analysts believe Thermax will benefit due to its high exposure (85 per cent of revenues) to the industrial equipment segment. The company's order book stands at Rs 6,985 crore (twice trailing revenues). However, considering that valuations are rich, the stock could be bought on dips. Voltas, too, stands to gain on the back of a strong demand and growth in its cooling equipment and systems business. On the flip side, analysts are cautious about making investments in ABB (due to its rich valuations and subdued performance) and Suzlon Energy (on concerns over low revenue visibility).
