Capital Goods Q4 Results Preview - Execution, Margin To Be Key Monitorables: Motilal Oswal

Motilal Oswal Report

There has been a moderation in order inflows in Q4 FY24 owing to the impending election cycle. However, for key verticals such as renewable energy, power transmission and distribution, defense, railways, metro and water, order inflows have been steady overall in FY24 thanks to the government’s continued thrust on capex.

On the private side, investment activity has been selective, primarily in areas such as data centers, real estate, cement, metals and mining, industrial automation, and PLI-led capex. Green shoots are visible and the ordering momentum is expected to gather steam in the post-election period and is resulting in valuation re-rating for the entire sector.

We believe that strong order books of the companies should provide healthy revenue visibility. We expect 15% YoY growth in execution in Q4 FY24. Supply chain issues that had affected previous quarters may continue to weigh on execution over the next couple of quarters, with the Red Sea crisis being a key monitorable.

We expect engineering, procurement and construction companies – Larsen and Toubro Ltd., KEC International Ltd., and KPIL – to see a gradual margin expansion as their low-margin legacy projects are near completion. We expect product companies to pass on lower raw material price benefits to end-users.

As a result, we expect a ~25 basis points YoY contraction in Ebitda margin for our coverage universe. In Q4 FY24, we estimate our coverage companies to report revenue growth of 15% YoY, Ebitda growth of 13% YoY, and profit after tax growth of 5% YoY.

Our top picks ABB India Ltd., L&T, and Kirloskar Oil Engines Ltd. remain our top picks in the sector. We expect ABB to be the key beneficiary of an improved addressable market for short-cycle orders from the private sector as well as transmission, railways, data center, and PLI-led spending. We expect L&T to continue to benefit from both domestic and international spending, along with control over its working capital.

We like Kirloskar Oil because of its attractive valuations and as it has further scope of re-rating from current levels.

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