Margins to start to stabilise from Q2FY23E onwards - Capital Goods Q2FY23E Preview
Overall, all EPC companies under our coverage are expected to witness moderate order inflows with improved execution. The order pipeline remains robust across T&D, green energy corridor, data centres, railways, transportation, water and infrastructure, etc. Key risks remain project delays/deferrals and lower conversion rate.
Overall, the coverage universe revenue is expected to grow 18.3% YoY owing to a decent pick-up in execution for EPC companies like L&T, KEC and Thermax. In our bearings coverage universe, we see a sequential increase in revenues in the range of 4-7% (on high base). This is largely due to the better performance of the auto sector, especially 2-W in July-September. However, we expect coverage universe EBITDA to grow 16.2% YoY although commodity costs are on a declining trend. However, they are still at higher levels compared to pre-Covid and earlier levels. Logistical issues are expected to impact margins while companies expect to pass on these pressures with a lag of a quarter. Consequently, overall PAT is expected to grow 9.1% YoY. On the order front, as the demand environment is healthy and tender/enquiry pipeline continues to be robust, this augurs well for ordering growth in FY23E.
Overall, EPC companies like Larsen & Toubro (L&T), KEC, Bharat Electronics (BEL) and Cochin Shipyard are expected to remain focused on working capital and cash flow management amid better execution and focus on receivables collections. Companies with stronger balance sheets and cash flows are well placed to gain the most from a gradual economic recovery. Product oriented companies like SKF India, ABB India, Elgi Equipment, AIA Engineering, which have a strong balance sheet, zero debt and healthy cash balances are likely to benefit as demand is gradually returning back to normal.
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