Investment cycle yet to bottom out

Aug 20 2012, 04:31 IST
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SummaryOur tracking of 11 uncovered small industrials indicates flat top line with 5% Ebitda decline and 10% lower PAT.

Has the investment activity bottomed out? We present Q1FY13 review and macro data points relating to cycle. We note weakening investment activity with declining financial closures/project announcement, macro numbers (PMI and IIP), even industrial consumable items stagnating and several companies sharing more than even 50% decline in some areas. Still, good enquiries and domestic manufacturing gaining ground are positives. Commodities, interest rates and competition remain high. Retain cautious stance with relative preference for Voltas, CRG, L&T, Cummins, Sadbhav and ADSEZ.

Investment cycle may not have bottomed out as yet; several data points suggest exacerbating trend: We note slowing investment demand based on (i) financial sanctions (RBI data) to private sector projects declining (down 46% in FY2012) at an accelerating pace (Q4FY12 down 70% y-o-y), (ii) project investments (CMIE) continuing to contract in Q1FY13 (down 40% y-o-y, level now similar to last seen in Q1FY06), (iii) even consumable items (reflective of opex rather than capex) like abrasives (Carborundum and Grindwell sales data) flattening in Q1FY13, also getting reflected in macro variables with IIP moving average (4 months) turning negative in June 2012 and PMI for July declining sharply, and (iv) several companies facing broad capex (capital expenditure) demand highlighting about 50-60% drop in ordering activity. Our tracking of 11 uncovered small industrials (Q1 salesóR43 bn) indicates flat top line with 5% Ebitda (earnings before interest, depreciation and amortisation ) decline and 10% lower PAT (profit after tax); covered companiesí performance is better primarily led by long execution cycle companies such as L&T and Bhel.

Commentary weak; Wcap cycle elongates; enquiries still good and domestic manufacturing gains ground:

Power: Generation projects (15 GW currently at tendering stage) may get impacted by sectoral (land acquisition, clearances) and concentration issues (Adani is MDO for most projects). T&D activity from state utilities and industry continues to remain weak (PGCIL lone bright star). Prices decline momentum may have halted but no clear sign of price improvement as yet Roads: Q1 has started on a slow note on (i) EPC MCA delays and (ii) demanding PPP-AC (delaying BOT approvals). Credit growth has also slumped affecting execution of recently won projects. Some developers (IRB, Sadbhav) comment that traffic growth may be getting affected now.

Industrial capex: Most companies commented upon delay in deliveries, slow incremental ordering, delayed payments and competition. Even operational expenditure is coming under pressure (data points from products such as abrasives). In commercial real estate also companies cited

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