Capital Goods - Commodity price volatility: Identifying winners - Motilal Oswal

BHEL, Thermax and Cummins key gainers; L&T relatively insulated

The prices of industrial commodities have declined sharply in USD terms. In INR terms, the price increases have moderated, and in several cases, prices have stabilized. This should have a positive impact on the EBITDA margins of capital goods companies.

Given the backdrop of continuously increasing raw material prices till the end of Dec'11, we believe capital goods companies would have factored in continued cost inflation at the time of project bidding. Stable raw material prices will support profitability, especially of long gestation projects.

BHEL, Thermax and Cummins gain the most from benign/softening industrial commodity prices, given the higher manufacturing component. L&T is better positioned to manage the volatility in international commodity prices, given its diversified raw material basket. ABB/Siemens have a high component of traded/project business - unfavorable currency movements have been offsetting a large part of the gains from softening international commodity prices.

Over a longer term we believe that a scenario of increasing commodity prices is more beneficial for capital goods companies, particularly those exposed to industrial commodities as it results in an improvement in the demand environment. L&T remains our top pick.

Source : Equity Bulls

Keywords