EXPECTED BUDGET IMPACT: Positive
LONG TERM OUTLOOK: Positive
Reflecting the sluggish capex cycle, the capital goods index, which is barometer of the growth in the sector has posted further contraction in the current fiscal. For the period Apr-Nov 2012, capital goods index remained in the negative territory in seven out of eight months.
Growth rate of electrical equipment sector decelerated to 6.9% in 2011-12 as compared to 11.3% and 13.7% in 2009-10 and 2010-11 respectively. For the first time in 10 years, the electrical equipment industry had seen a negative growth of 3.9% in the first five months of the current fiscal (2012-13).
Key factors that have been contributing to the holdup in infrastructure spending continue to persist. These include increasing delays in project off take due to longer time on land acquisition and environmental clearance. This has retarded project execution in road building, power plants and steel mills. Competitive intensity has also been increasing with Chinese/Korean players setting up a manufacturing foothold in the country. In Transmission and Distribution equipment, availability of unutilized capacity is leading to margin erosion and higher capital engagement. Concerns regarding higher interest rates led by increasing inflation have also affected the sector.
The third quarter results for the sector were reflective of the challenging business environment for the sector. While there has been an order intake has lagged expectations, execution slowdown has impacted revenue generation. In general, most capital goods companies are seeing erosion in cash due to longer working capital cycle. Amidst the challenges cited above, consumer goods companies like Havells India, Bajaj Electricals, Crompton Greaves (consumer division) continue to post impressive growth trend. In 9MFY12-13, consumer durable companies under our coverage reported aggregate growth of 20% YoY.
In terms of specific demand, the government has during the fiscal already raised import duty on power generating equipment hence this demand has been addressed.
Our preferred picks are L&T, Greaves Cotton, Cummins India, Engineers India.