Following
a mixed Oct-Dec earnings season, stocks of capital goods companies are seen taking
cues from the wider market in the absence of sector-specific triggers.
Investors are seen
building positions in stocks of L&T and Crompton Greaves. We are giving suggestion
on Crompton Greaves, (1) strong domestic business (2) balance returning to overseas
profitability (3) prima facie market pricing in international EV of `5-7 bn (negative
equity value) and (4) positive traction in automation, drives and exports.
Similarly, long-term investor may also pick up stocks of capital goods and infrastructure
major Larsen & Toubro. L&T continues to be the best play in India infrastructure
space, given its strong business model, diverse skill sets, strong execution capabilities
and relatively healthy/large balance sheet. The
same cannot be said about state-owned capital goods company Bharat Heavy Electricals,
as the company continued to disappoint investors, posting a net profit of 6.95 bln
rupees, down 41.2% on year. We had estimated the company's net profit at 7.04
bln rupees.
With a 9.5% revenue compound annual growth rate fall likely over FY13-FY16E along
with margin contraction, we expect BHEL to post earnings CAGR decline of 21.1%
over FY13-FY16E, thereby capping its valuation. Muted outlook on order inflow in
the near term and rising slow-moving projects in the order book remain an
overhang.
