Industrials - Q2FY21 Results Preview - Growth pickup awaited - HDFC Securities

Converging towards normalisation: Within our coverage universe, we expect operations to have normalised from Sep-20. Labour is back/exceeded pre-COVID-19 levels, which augurs well for execution. Some of the cost rationalisation measures would continue even post lifting of lockdown restrictions and shall help improve EBITDA margins. FYTD21 ordering has been robust, and momentum is expected to continue for 2HFY21E. Working capital is expected to improve over the next two quarters as GST impasse gets resolved between the Central and State Governments. High-frequency data is pointing towards economic recovery, which shall alleviate concern on the government fiscal situation. States are also gearing up to take new infrastructure projects.

Labour reverse migration has resulted in availability crossing pre-COVID-19 levels: Labour situation has improved over the past two months with opening up of state borders and travel. Most of our coverage universe is sitting on decade high order book, and with labour coming back, we look forward to a normal 3QFY21. The growth is expected to bounce back sharply from 4QFY21. Urban centric companies in building space continue to lag roads infra peers in terms of labour availability. We look towards 3QFY21 end labour normalisation for building EPC companies.

Capital goods ordering more of replacement demand, EPC ordering has surprised positively: We are seeing a strong bid pipeline for EPC companies. The NHAI has already awarded close to Rs 480bn of new projects FYTD21. Bids worth Rs 100bn are yet to be opened. The NHAI is expected to award Rs 700-800bn worth of projects during FY21E. For larger capital goods companies, short cycle orders may be more back-ended as private Capex and large infrastructure project awards may happen towards late 2HFY21. High-speed rail tenders are already up for grabs and may get finalised by 3QFY21. Augurs well for L&T, Siemens, and ABB. Recovery in Auto, Pharma, F&B also augurs well for automation companies.

Results to be mixed bag, with a positive bias: We expect most of the coverage universe to report a YoY decline in revenue/PAT as the early part of 2QFY21 was impacted by COVID-19 and later part by the monsoon. Despite this, the cost rationalisation measures taken by coverage companies may continue till FY21E end and result in earnings surprises. Collection efficiency remains under control barring a few states where state governments are awaiting payment of GST dues. Central agencies payment remains on track, and hence NWC is expected to remain stable. Debt may also remain stable.

Re-rating contingent on improving government finances, sustainability of ordering and growth pickup from 3QFY21: Market remains wary of government finances and pressing fiscal position. Improvement in GST collections, sustainable ordering and prompt payment by state governments will allay some of these concerns. Infra companies are sitting on decade-high order books, decade-low debt, decade-best NWC and decade-low valuation (~5x on FY23E EPS). This sets the tone for re-rating once growth recovery pans out.

Recommendations and stock picks: From a near to mid-term perspective, the government would drive ordering, and private Capex/opex will be late-cycle recovery. Hence, recovery plays with high government exposure will remain in focus. In capital goods, LT is our top pick. In the mid-cap space, KPTL, KNR, PNC, HG Infra and Ahluwalia are our top picks.

Source : Equity Bulls

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