With factories shut, slumping demand and a swollen order book that awaits completion, the ramifications of the novel coronavirus on the engineering and capital goods sector are far-reaching.
With factories shut, slumping demand and a swollen order book that awaits completion, the ramifications of the novel coronavirus on the engineering and capital goods sector are far-reaching. Having ended the January-March quarter with virtually no manufacturing taking place, the soon-to-come fourth quarter results of the sector are likely to paint a grim picture. At this point, the focus shifts to whether investors should dive into the sector or refrain entirely. ICICI Securities, is not among those advising investors to avoid the sector entirely, and looks quite optimistic about three engineering majors to post strong numbers.
Larsen & Toubro
Target price: Rs 1165
Popular belief is that companies with a strong balance sheet will be able to cruise through these troubled times, and Larsen & Toubro (L&T) is anyone’s best bet on that hypothesis. L&T, according to ICICI Securities will post a revenue of Rs 41,650 crore in the March quarter, going up from Rs 36,240 crore in the third quarter of the last fiscal. “Overall execution will be lower due to supply side challenges due to coronavirus outbreak and lockdown at the end of the quarter. However, integration of Mindtree will provide some support to the overall growth,” the brokerage said. The consolidated profit after tax of L&T is being pegged at Rs 2700 crore with EBITDA margin going up to 11.9% from 11.4% in the previous quarter. The IT services segment of the company under MindTree is expected to be the White Knight this quarter bringing in revenues of over Rs 5600 crore alone. Currently trading at Rs 812 per share, the upside to the scrip is around 43%.
Target price: Rs 1343
Siemens is another company with strong financials, making it capable of riding the trouble that novel coronavirus brings. Siemens is expected to bring in an extra Rs 1000 crore in revenue in the March quarter as compared to the previous quarter. With this profit after tax is likely to surge to Rs 328 crore, up from Rs 267 crore. However, the order intake for the quarter is expected to be weak at around Rs 2.4 crore. “We factor-in 2.2% growth, implying a slowdown across all segments due to execution challenges. Overall order intake is expected to be muted given the delay in decision making by private sector players,” ICICI Securities said. Siemens is being expected to deliver 16% upside from the current price.
Target Price: Rs 537
Although GE Power India is expected to post a fall in revenue on-quarter basis, it still makes it to ICICI Securities recommendations. “We factor in muted growth of 2.8% for revenues due to supply side issues from coronavirus, supported partially by a strong order book. Given that almost half of the current orderbook (Rs88bn) is FGD-related, near- to medium-term growth will be impacted due to supply side and execution challenges arising from COVID-19 outbreak,” ICICI Securities said explaining the rationale. For GE Power India to reach the target price pegged by the brokerage the stock needs to go up by over 16% from its current market price.