With major economies now rebounding from the pandemic lows and planning large capital expenditure programs, analysts at Bank of America (BofA) see the potential for exports to augment incremental growth for the industrial sector.
With major economies now rebounding from the pandemic lows and planning large capital expenditure programs, analysts at Bank of America (BofA) see the potential for exports to augment incremental growth for the industrial sector. “Management commentaries already show early signs of likely pick up in export traction, with most major economies globally having rebounded ahead of domestic market recovery, and have plans of pursuing large capex programs. US infra stimulus of $1 trillion, in particular, could be an opportunity,” BofA said in a recent report. Earlier BofA had highlighted that domestic industrial stocks could benefit from the multi-year capex cycle in India.
Exports already make a significant portion of the sales of domestic companies. BofA highlighted that 21% of sales for domestic industrial companies on average come from exports. “Contribution is slightly on the higher side for capital good companies like diesel genset producer Cummins, automation companies like Honeywell and Siemens, abrasives makers Carborundum Universal, Grindwell Norton and bearing manufacturer Timken; while being at the lower end for pumps, compressors and defence firms,” they added.
“Overall, we see several drivers of a step up in Industrial firms’ export growth: ambitions to expand exports (21% of sales on avg. currently); relatively low utilizations at 50-85%; support from their US/Europe parents in case of MNCs; and plans of M&A activity specifically geared towards export markets,” the report said. Analysts retain their overweight on industrial, seeing that valuations are just at long term average. “See scope for valuation expansion as exports complement an accelerating capex cycle, driving expansion in earnings growth & RoEs.”
Analysts have price objective of Rs 1,954 per share for L&T stocks. “We have valued its parent core business (adjusted for dividend income from its subsidiaries/JVs) at 20x 2 yr forward earnings, for core business RoEs of 16% in FY23E,” they said. Execution delays in the Middle East, delay in execution ramp-up of domestic infrastructure business or miss on domestic infrastructure margins on higher commodity prices are some of the downside risks aligned with the company. L&T trades at Rs 1,689 per share at this juncture.
The stock price objective is set at Rs 874 per share, implying a 16% upside from current levels. Potential diversion of ADSEZ’s cash flows toward the cash gap for Adani’s group companies (mainly Adani Power), increase in exposure to related parties via loans/receivables, increase in promoter pledge across group entities, and slower than estimated volume growth recovery from Covid-19 linked disruptions are risks aligned with the stock.
Container Corporation of India
BofA analysts have a target price of Rs 753 per share on Concor based on 26x two-year forward earnings or close to +2SD levels to the stock’s long-term average valuation multiple. Timely completion of the strategic sale, Greater than expected recovery in India’s near term EXIM trade driving robust container traffic growth at ports and hence, for Concor, and exponential domestic trade growth fuelling volumes beyond expectation are upsides risks seen by analysts. The stock currently trades at Rs 726 apiece.
Cummins India stock price has rallied 15% in the last one month, putting it in touching distance of the price objective of Rs 1,077 per share. BofA said that the government’s expediting infra capex has scope to provide upside to Cummins’ muted domestic volume expectations. “Downside risks to our price objective are: lower exports due to weakness in the Middle East and Africa, and a further contraction in margins, due to adverse product mix and commodity price hike,” BofA said.
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