Challenging year ahead

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Jan 14 2013, 02:59 IST

Divergence between top-down and bottom-up views on the investment cycle is increasing. While the top-down view expects a cyclical revival led by macro recovery, potential reforms and interest rate easing, our bottom-up analysis suggests continued weakness in the investment cycle in FY14. Hence, we downgrade L&T to Equal Weight (Price Target R1,750) and downgrade Cummins to EW (PT R563). We recommend switching into interest rate sensitive stocks JPA and Adani Ports (both rated OW—Overweight).

Cycle view: While our overall view on cycle recovery is negative, in terms of relative end-market positioning, we are negative on the power (boiler/turbine) cycle, while we expect T&D (transmission and distribution) to weaken in FY14 and the industrial capex (capital expenditure) revival to remain elusive. Cement, steel, and downstream oil & gas should all be weak.

We are positive on the infrastructure order pipeline but the land acquisition/ approval process is constraining ordering and there is limited progress on easing bottlenecks. We expect road/dedicated freight corridor and metro orders to be strong. Within industrials, we expect fertiliser and upstream oil & gas capex also to be strong.

Key OW/UW picks: We prefer infra asset owners over capital equipment names. Our OW ideas in the infra sector are JPA and Adani Ports. Our key UW (Underweight) is BHEL. While we prefer L&T relative to BHEL, we downgrade it to EW to reflect the weak FY14 outlook. We also downgrade Cummins to EW due to steep valuations.

How are end-markets faring in FY13? In FY13 year to date, power boiler/turbine

... contd.

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