Another weak quarter; select smaller companies clocked growth: During Q1FY2016, the overall revenue of our coverage universe remained flattish due to substantial decline in the revenues of BHEL, Crompton Greaves Ltd (CGL) and a flat revenue growth of L&T. Nevertheless, select mid-cap companies have delivered a healthy revenue growth (YoY) in this quarter; companies like Thermax, Skipper, Kalpataru Power Transmission Ltd (KPTL) and Va Tech Wabag (VTW) recorded very healthy top-line growth. We believe the delay in expected recovery cycle is clearly reflecting in the overall top-line performance of our coverage companies. The slow recovery in industrial activities is also reflected in the overall order inflow trend; flat YoY Ex-BHEL. During this quarter, BHEL’s order inflow surged substantially on account of a single large order (around Rs18,000 crore) from the newly formed Telangana state. Currently, the book-to-bill ratio stands at around 3.3x against 2.5x during Q1FY2015.
Earnings remained subdued with margin pressure: The top-line performance was flattish YoY but most of the companies under our coverage witnessed a margin contraction on a Y-o-Y basis. Among heavyweights, BHEL continued to face negative operating leverage challenge and the industrial segment of L&T felt the similar pinch in this quarter. The margins of CGL and VTW were negatively affected due to few one-offs like delay in shipment, provisions and cost overrun in specific projects or regions. On the positive side, select smaller companies like KPTL, Thermax and Finolex Cables surprised us positively on the margin front. In the bottom line, these companies also reported a very strong earnings growth, but heavyweights were negative or flattish. VTW and CGL reported losses. Consequently, net earnings of our coverage (ex-BHEL) declined by 9% YoY in Q1FY2016.
Capex cycle recovery on the way, but on a slower path: The investment cycle recovery is obvious but the progress is slower than expected earlier. Till date, we have seen that policies are rightly framed to revive the investment cycle, however, the ordering activities are yet to start. In select pockets like railways and road we are seeing activities; few other sectors like defence and infrastructure could follow soon. We believe the capital goods sector could witness a meaningful change of wind from the investment cycle recovery after a few more quarters only. In the meanwhile, the Street has already factored in the positives by now; therefore there could be some patches of disappointment in between along the corporate earnings performance in between. Nevertheless, we broadly remain constructive on the sector and retain our positive stance selectively on quality companies.
Our preferred picks are L&T in large-cap while we like KPTL, Skipper and V-Guard in the mid-cap space.
Leaders in Q1FY2016: Thermax, Finolex Cables, Skipper
Laggards in Q1FY2016: Crompton Greaves, Va Tech Wabag, BHEL
Get free daily stock market tips and updates here by filling your email id in the subscription box.