The sector is expected to report robust performance in the September quarter with no major surprises.
Companies in the capital goods space are likely to show a pick-up in the execution of their strong order book (two-four times 2010-11 revenues). Aggregate sales of 19 leading companies may jump 20 per cent year-on-year (y-o-y) and 16 per cent sequentially during the September quarter. Besides BHEL and Siemens, both of which are expected to grow 17 per cent y-o-y, companies outside the competitive power transmission and distribution space, including Bharat Electronics, Cummins India, Thermax and BEML, are also likely to grow faster.
Operating profit margin and net profit margin are expected to fall marginally by about 50 basis points (bps) and 25 bps y-o-y to 14 per cent and 10 per cent, respectively, mainly supported by operating efficiencies.
The strong 13.8 per cent growth in the Index of Industrial Production in July (mainly due to 63 per cent growth in the capital goods index) has boosted sentiment and investors have regained confidence about many companies. Hence, order inflows, muted in the first half of 2010-11, will pick up in the second half, helped by industrial capex demand and power transmission orders. According to the Eleventh Five-Year Plan, Power Grid Corporation is expected to invest Rs 30,000 crore by 2011-12.
Analysts are positive on the sector, especially companies that are outside the competitive power value chain (generation, transmission and distribution). They expect a pick-up in the capex cycle, with major sectors of the economy nearing peak capacity utilisation. But this will not perk up stock prices immediately despite their underperformance over the past one year, as they already trade at premium valuations of an average 20 times 2011-12 estimates earnings. The BSE Capital Goods index rose nine per cent in the September quarter compared to Sensex’s 14 per cent rise.
