All engineering, procurement and construction (EPC) companies are likely to see significant order inflows and enhanced execution in Q3FY23, as per brokerage house ICICI Direct Research's estimates for the third quarter.
Among the brokerage house's top picks are Hindustan Aeronautics, KEC International, Thermax, Elgi Equipments, and Larsen & Toubro.
"Overall, EPC companies are expected to post a good performance on execution front factoring in some challenges. Margins are expected to stabilise further as raw material prices are stabilising," added the brokerage.
Larsen & Toubro reported EPC orders in the railway, hydrocarbon, power T&D, water treatment, heavy engineering, buildings, and factory segments totaling close to ₹20,500-34,000 crore.
KEC International has reported reasonable order inflows of ₹3,956 crore in the transmission and distribution (T&D) sector, helped by orders from T&D (domestic, international markets) railways, civil, etc.
"Overall, order inflows are expected to remain strong," said the brokerage. However, it added that lower conversion rates and project delays/deferrals continue to be major threats.
Q3FY23 revenue expectations
A reasonable improvement in execution for EPC firms like Larsen & Toubro, KEC International, and Thermax is expected to cause the overall revenue in the brokerage's coverage to increase by 9.1 percent on an annual basis.
Defense coverage revenue is expected to expand by 6.7 percent annually, and Data Patterns, Bharat Electronics, Mazagon Dock, and Bharat Dynamics are set to lead the way. These companies are also predicted to enjoy somewhat improved order execution.
On the other hand, subdued revenue growth is observed in the brokerage's bearings covered space, mostly as a result of the quarter's weak export and domestic auto sector performance.
"We see a sequential decline in aggregate revenues by 13.8 percent on muted exports and auto sector performance. SKF is expected to report 5.5 percent on year growth in revenues on account of higher share in industrial activities where execution has been relatively better. Timken is expected to report flattish revenues on a sluggish auto and exports performance. NRB’s revenue is expected to decline mainly led by a decline in 2-wheeler performance," said the brokerage.
Focus on working capital, cash flows likely to continue
Overall, EPC firms including Larsen & Toubro, KEC International, Bharat Electronics, and Cochin Shipyard are expected to maintain their focus on working capital and cash flow management despite improved execution.
"Companies with stronger balance sheets and cash flows are well placed to gain the most from a gradual economic recovery," said the brokerage.
Further, as demand gradually returns to normal, product-oriented businesses with strong balance sheets, minimal debt, and ample cash reserves, like SKF India, ABB India, Elgi Equipment, and AIA Engineering, are likely to benefit.