Recovery momentum to stay

Updated: Oct 20 2014, 10:15am hrs
We expect to see sustained recovery momentum in Q2: Industry players suggest strong optimism on business outlook (citing improved project clearances) as the new government has started making a positive noise. We expect early signs of such changes to be reflected in improving execution (top line growth) and operating leverage-led margin expansion. We expect the sector (ex-Bhel) to report 3% year-on-year earnings growth during Q2FY15, driven by 5% y-o-y sales growth and 12% y-o-y Ebitda growth (60bp margin expansion), while higher depreciation costs due to revised norms should have eaten into a portion of the earnings growth.

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Looking for Q2 earnings winners: We expect Voltas (+21% y-o-y), CGCrompton Greaves-- (+23% y-o-y), and ABB India (+31% y-o-y) to have performed well during Q2 earnings, while Cummins India (-14% y-o-y), Siemens India (-9% y-o-y), and Thermax India (-7% y-o-y) to report weak earnings. We expect L&T to report 5% y-o-y standalone earnings growth, with recurring consolidated earnings growth at 4% sequentially.

We prefer infra exposure over industrial capex: We continue to expect a cyclical recovery over the next 12 months, although the early part of the recovery likely will be driven by the infrastructure sector, while industrial capex catches up with a 12-18-month lag. Hence, our investment outlook favours players focussed on infrastructure development (ex-power); we steer clear of companies focussed on industrial capex, as low utilisation levels will likely continue to delay fresh capex.

We rate L&T OW and Voltas OW(V) (Overweight with volatility) . L&T ticks both the infra and domestic long-cycle manufacturing revival boxes thereby improving our earnings visibility. Voltas, on the other hand, should stage a turnaround in its Middle East business, as well as benefit from consumer discretionary spend increases in its domestic air conditioning business.