Capital Goods - Jan-Mar'22 Earnings Preview - Healthy order inflows; margins under pressure

Mr.Amit Anwani, Research Analyst at Prabhudas Lilladher

We expect Q4FY22 margins to be impacted in short term due to higher commodity price, supply chain disruption and higher freight cost, which has further accelerated due to geopolitical tensions. Revenues are expected to report a growth of ~5.2% YoY (11.0% YoY ex. L&T) for our coverage universe with product companies expected to report growth of 20.3%, led by healthy demand in both domestic as well as exports market and commodity price pass through. While for EPC companies we expect revenue to grow ~0.8% YoY (-0.5% YoY ex. L&T), due to slower execution amidst higher commodity price. In the near term, working capital may get impacted as payment cycle from government orders may get prolonged due to higher crude price. We continue to prefer companies with strong balance sheet, low debt levels, good corporate governance, well managed working capital cycle and long-term scalability. Our top picks in the sector are L&T and BEL.

Tender pipeline remains intact, though short term blip visible: Enquiry and tender pipeline has improved over past few quarters, though pace of order conversion will be key monitorable, as there can be some spill over in near term due to higher commodity price and current geopolitical tension. In domestic market traction continues to remain strong from sectors such as infrastructure, data center, railways, metro, pharma, cement, chemical, metal, mining and F&B. With higher crude price we expect capex to boost from oil exporting regions like Middle East (ME). On exports front enquiry pipeline stands strong from regions like Africa, ME, US, and SAARC. In our view, long term ordering activity likely to remain strong considering strong tender pipeline, government thrust on overall infrastructure development and private capex picking up. The key monitorables will be management guidance on execution pace, margins, working capital and tender pipeline.

Source : Equity Bulls

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CapitalGoods Q4FY22 EarningsPreview PrabhudasLilladher