The new order

Engineering firms continue to see buoyancy in contracts

Dalal Street has bet heavily on engineering stocks doing well this quarter, as the industry's order books are burgeoning. Stock prices of Bhel, Larsen & Toubro, Thermax and Siemens have zoomed during the second half of 2005-06.

As a result, these stocks are hitting new highs or are close to their all-time highs. While the Sensex has gained 20 per cent since the beginning of July 2005, engineering stocks have gained between 30 per cent and 50 per cent.

Besides infrastructure, growth is also expected from the oil exploration segment in India and the Middle East. Investment in mining, power and co-generation plants in the corporate sector is also buoyant.

Thus far, the order flow has been in line with market expectations. L&T has said that it has upped its order book growth target from 20 per cent to 35 per cent for the second half.

Its order book backlog has gone up by about Rs 1,000 crore since September 2005 to Rs 21,000 crore at present, and the company expects it to go up to Rs 28,000 crore by March 2006.

L&T announced bagging new contracts of Rs 252 crore recently in the electrical, transmission and distribution business. Bhel has benefited from investments in power, which had an order book of Rs 32,200 crore in September 2005. Though the company has not disclosed any recent wins, analysts expect the company is doing well on this front.

Siemens India, in a consortium with its Germany counterpart, has bagged an order of Rs 1,000 crore for developing power transmission network in Qatar.

In July, it was awarded a Rs 175 crore order from Bangalore International Airport. Bharat Earth Movers has bagged orders of Rs 368 crore in October 2005 from coal companies and NMDC. Its order book stood at Rs 2,457 crore at the end of October.

After staying at Rs 11,300 crore in September 2004 and March 2005, Thermax's order book backlog has risen to Rs 12,300 crore in September 2005. Since then, it has announced cogen plant orders of Rs 234 crore and an energy systems order of Rs 50 crore.

In terms of valuations, most of these stocks are valued handsomely, because of the growth expectations. But even at these valuations, analysts believe that the sector will not disappoint investors.

BEML has the lowest trailing P/E of around 16. L&T trades at a P/E of 18.76, while BHEL has a P/E of 26.67. Growth expectations in Thermax and Siemens are much higher as the stocks trade at trailing P/Es of 31.8 and 42.3.

Jindal Saw

Jindal Saw's numbers for the quarter ended September have been a trifle disappointing which is probably why the stock fell over 4 per cent on Wednesday to close at Rs 372.

Top line growth at 10.6 per cent to Rs 564.71 crore was lower than expected. That's primarily because exports of steel plates to the US have fetched lower realisations.

Besides, the company has been increasing its sales in the domestic market as a result of which the excise duty paid out this quarter has been significantly higher.

However, the growth in the earnings before interest tax and depreciation (EBITDA) has been a smart 46 per cent at Rs 70.28 crore in the September quarter over previous corresponding period.

Also, EBITDA margins too have expanded by about 300 basis points to 12.4 per cent over the September 2004 quarter, though on a sequential basis they are down by 50 basis points.

The company has managed to keep input costs under control: raw materials as a percentage of sales was down 300 basis points to 69 per cent in September 2005. Net profit of Rs 24.13 crore, has been lower by about 5 per cent since the outflows on account of interest and depreciation have been higher.

Looking ahead, the company's performance should improve in the coming year with its ductile and cast iron facility in Gujarat, which has a capacity of 2 lakh tonne per annum, improving its utilisation levels.

Capacity utilisation, which is around 35-40 per cent at present, at the seamless pipes unit in Nashik too should go up. Thus, volumes should be higher next year.

Besides, interest costs would be lower since the company has raised $65 mn through a global depository issue in September 2005. At the current price of Rs 372, the stock trades at around 9.3 times estimated 2005-06 (September end) earnings and appears to be reasonably valued.