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Expecting A Turnaround

Nishchal Maheshwari, EVP, Edelweiss Securities, believes that the capex cycle could turn around by Q3 or Q4 of CY11…

Nishchal Maheshwari, EVP and Head-Institutional Equities Research, Edelweiss Securities, on when the capex cycle is likely to turn

There is talk of the capex cycle turning around. Some quarters put it at the end of FY12 while others put it in FY13. What are your views?
Demand within the economy remains strong, but we have yet to see that translate into ground reality. So when the capex cycle will turn is a question mark right now. But we should see government expenditure act as the first trigger for the sector. This should happen by, say, Q3 or Q4 of the current year. Private sector capex will follow only later.

In FY11, order inflow for capital goods companies improved as compared to FY10. What is your take on order book growth in FY12?
For the power sector we see order book growth of 10-12 per cent this year. We could see faster growth in the transmission sub-sector — at around 20 per cent — as compared to, say, generation.

Between transmission, transformer and tower segments, which provides the best opportunity? And which companies are best placed to gain from the opportunity?
Of the three, transmission seems to be the best opportunity. India will see investments of `30,000-40,000 crore in transmission in the next couple of years. This segment could see 20-25 per cent growth this year. The companies that are best placed to benefit from growth in this segment are KEC, Kalpataru and Jyoti Structures.

What earnings growth do you foresee in FY12? And in your opinion, what will drive growth in the next few quarters?
The sector could see earnings growth of 12-13 per cent. BHEL, L&T, Thermax and other large companies are likely to drive this sector’s earnings growth in the current year.

How big is the threat that Indian companies in this sector face from Chinese firms?
Most of the foreign threat arises from Chinese companies that are primarily in the generation segment. Companies like BHEL, Bharat Forge, L&T and BGR Energy could see their order books get depressed due to the competition from Chinese players.

What is your view on margin sustainability? Where do you think they will stand in FY12 vis-à-vis FY11?
Margins could remain under pressure over the next two quarters. Presently, we estimate 100-150 basis points suppression in margins from current levels.

Do you see all the negatives priced into the current valuations for the sector? Or do you see more downward pressure on valuations?
We will have to wait for the results. Stock valuations could go down by another 5 per cent if the numbers disappoint the Street’s expectations.

What are your top picks in the capital goods space and why?
We are bullish on L&T and Thermax — both for their healthy order books and strong execution skills.