Stock prices of infrastructure companies have rallied in the recent past on the hope of further reforms by the government after restructuring of state electricity boards (SEBs). But for any further re-rating, resolution of issues like land acquisition, environment clearances and coal linkages will be critical, say analysts. That looks a difficult task and could take time, thereby limiting further upsides for the stocks. Says Nitin Arora, analyst, Angel Broking, “Although interest rate cuts and increasing investment in the sector remain key triggers for infrastructure (construction) stocks, removal of bottlenecks, such as delays in environmental clearance and land-acquisition issues, are also of prime importance for the execution pace to pick up.”
Also, while performance in the September quarter is likely to remain muted due to weak execution and high interest rates, analysts do not see clear signs of improvement in the coming quarters.
Referring to capital goods companies, Satyam Agarwal, analyst, Motilal Oswal Securities, says, “Management commentary across companies indicates a challenging and uncertain outlook in the medium term.” Besides restructuring of SEBs and raising foreign direct investment in power trading exchanges up to 49 per cent, the government needs to follow with measures like captive coal allocation and land acquisition policy to improve the prospects of the power sector, points out an analyst. Amid these issues, the only stock that analysts are positive on is Larsen & Toubro (L&T), which is also expected to report decent performance for the quarter ended September.
Q2: L&T to perform better than others
Among top companies, only L&T is expected to report good performance on an overall basis, thanks to a diversified and healthy order book, better execution capability and strong balance sheet. While BHEL is also expected to report decent topline growth and drive the segment’s revenues, profitability is expected to a take hit due to margin pressure. NTPC is expected to bring down the performance of the power sector, especially on sales and operating profit fronts despite commissioning of 1,060 Mw, as overall power generation (read volumes) is expected to remain subdued due to coal supply constraints. Second, the company also undertook maintenance shutdown at some of its units.
In the construction segment, excluding L&T, other companies are expected to report a sharp drop in their cumulative bottom line, thanks to the challenging economic environment, high interest rate and declining order inflows. While order inflows will be a key monitorable for both L&T and BHEL, it will be the pace of capacity addition in the case of power companies like NTPC.
While analysts expect L&T to report 10-15 per cent growth (strong) in order inflows, they expect BHEL to show a decline thanks to sluggish ordering by utilities. For NTPC, while it has done better than historical levels with 2,200 Mw already added out of the targeted 4,300 Mw, the progress on the issue of coal supplies will be key to watch.
| VALUATIONS RUNNING AHEAD OF FUNDAMENTALS | ||||||||
| Sales | Operating Profit | Net Profit | OPM (%) | Chg (bps) | NPM (%) | Chg (bps) | P/E (x) (FY14E) | |
| Construction (8) | 13.3 | 11.1 | -4.0 | 12.3 | -24 | 4.2 | -77.0 | 14.3 |
| Excluding-L&T | 10.1 | 8.3 | -43.0 | 14.4 | -23 | 1.5 | -139.0 | |
| L&T | 16.5 | 15.1 | 11.0 | 10.3 | -13 | 6.8 | -30.0 | 17.3 |
| Capital Goods (10) | 5.0 | -0.8 | 1.0 | 12.0 | -73 | 8.2 | -35.0 | 16.6 |
| Excluding-BHEL | 2.0 | -3.1 | 6.0 | 7.7 | -41 | 5.3 | 19.0 | |
| BHEL | 10.4 | 0.7 | -2.0 | 17.4 | -167 | 12.2 | -149.0 | 12.8 |
| Power (10) | 12.6 | 3.5 | -20.0 | 22.7 | -199 | 8.7 | -354.0 | 13.0 |
| Excluding-NTPC | 22.9 | 5.4 | -27.0 | 23.5 | -392 | 5.7 | -383.0 | |
| NTPC | -0.7 | 0.5 | -15.0 | 21.3 | 24 | 13.5 | -223.0 | 13.5 |
| Overall (28) | 10.6 | 4.1 | -12.0 | 16.6 | -104 | 7.3 | -183.0 | |
| Figures pertaining to sales, operating profit and net profit reflect percentage change over the year ago quarter Bps is basis points All figures are estimates for September quarter, except PE which is for FY14 Source: Analyst reports Note: (a) Data includes companies with revenues of above Rs 1,000 crore (b) Consolidated figures wherever applicable Figures in brackets next to sector names represents number of companies | ||||||||
Outlook
L&T provides better revenue visibility compared to others and will be an immediate beneficiary of any pick-up in economic activity. Declining commodity prices should support margins, as one-third of the order book is based on fixed price contracts. Says Agarwal, “L&T remains the top pick (upgraded to ‘Buy’ a quarter back) on the back of continued strong order intake (led by infrastructure and overseas orders), excellent risk management, expected stable margins and management commitment to correct capital structure.”
In contrast, the outlook for BHEL remains cautious as any benefit of imposition of import duty on Chinese goods will be reflected only in the 13th five-year Plan orders, which will take time to get awarded. Says Rahul Kaul, analyst, Angel Broking, “In the boiler turbine generator (BTG) space, we continue to maintain our negative stance, owing to concerns of heightened competition and slowing of order inflows. The BTG market will further witness a dry spell as most of the planned orders have already been awarded and new orders are in the preliminary stages of discussions, which are likely to witness delay in finalisations due to ongoing headwinds (such as fuel issues, constraints in land acquisition and poor health of SEBs).”
Though NTPC is better placed than private peers in terms of fuel availability and pricing, declining coal prices and rupee appreciation are positives for the latter.
Says Shankar K, analyst, Edelweiss Securities, “Imported coal-based developers like Adani Power and JSW Energy will benefit to an extent on account of moderating imported coal prices and rupee appreciation.” So, keep your eyes on the progress on issues pertaining to fuel situation and land acquisition, as resolution of these could provide triggers for power stocks.
