Brokerage firm Sharekhan by BNP PARIBAS is positive on the capital goods sector as it believes the sector is in a sweet spot and can witness a strong Capex upcycle.
Sharekhan pointed out that the government’s efforts and initiatives such as Atmanirbhar Bharat, Power for All, Make in India, and PLI schemes have given an impetus to investments across various sectors of the economy and new opportunities are emerging.
Moreover, global companies are adopting the "China Plus One" strategy to de-risk their supply chains and are considering India as one of the alternatives. This has turned out to be a good opportunity for India as its manufacturing cost is low and the availability of skilled labour is high, Sharekhan underscored.
The brokerage firm has 'buy' calls on the following five stocks from the sector.
Larsen & Toubro | Target price: ₹2,390
The engineering behemoth, with its decades of experience in engineering and construction and robust track record, is well poised to be the key beneficiary of Capex upcycle, driven by investments in both public and private sectors.
For FY23, it is well on track to attain order intake and revenue growth guidance of 12-15 percent with a bias towards the upper band.
It expects OPM in the core projects business to be at 9.5 percent with a downside risk of 30 bps. However, with margin tailwinds in the form of better margin new orders and declining commodity prices and operating leverage, the brokerage firm expects a better margin profile in the coming quarters.
The company has chalked out a detailed five-year strategic plan ‘Lakshya 2026’ for pursuing profitable growth in its traditional businesses of EPC projects and manufacturing and expanding the size and scale of its IT&TS portfolio.
Under the plan, the company aims to grow its order inflows, and revenue at a 14 percent and 15 percent CAGR, respectively, and achieve core return on equity (RoE) of over 18 percent during FY2021-FY2026E. This should be achieved by pursuing new opportunities in data centres, green hydrogen, and e-commerce businesses, said the brokerage firm.
In addition, the unlocking of investments in Hyderabad metro and Nabha Power is being aggressively pursued and successful monetisation of the same should improve its working capital and debt profile.
"We expect its core business revenue and PAT to grow at 15 percent and 20 percent, respectively, over FY2022-FY2025E.
Bharat Electronics (BEL) | Target price: ₹130
BEL’s healthy order book of ₹52,795 crore, promising order inflow pipeline, and increasing indigenisation would drive the company’s long-term performance.
The government’s emphasis on ‘Make in India’ and ‘Atmanirbhar Bharat’ initiatives in the defence sector and production target of $25 billion by 2025 through indigenisation and higher exports in defence bodes well for players such as BEL.
BEL is focused on diversifying its revenue base by pursuing non-defence opportunities in homeland security, smart cities, energy storage products, solar, space electronics, networks, and cyber security.
"Growing exports (nearly 60 percent CAGR over FY22-24E) shall also aid revenue growth. We are bullish on BEL, given its strong manufacturing and R&D base, growing indigenisation, and strong balance sheet with healthy return ratios," said the brokerage firm.
VA Tech Wabag | Target price: ₹370
VA Tech Wabag has delivered a strong set of results in Q2FY23 with sharp sequential improvement in margin and execution.
The company is optimistic about growth opportunities present in desalination, ZLD, and water treatment solutions in both domestic and export markets.
The company is on an improving revenue and earnings growth trajectory, as concerns of high leverage and higher working capital woes are now behind it.
A well-funded strong order book provides comfort in execution and collections going ahead. Further, focus on water-related investments provide healthy order intake tailwinds for the company going ahead.
Triveni Turbine | Target price: ₹325
Triveni Turbine is well poised for a high-growth trajectory, led by strong order inflows and a promising inquiry pipeline in both 0-30 MW and 30-100 MW segments in the domestic and international markets.
The company’s entry into the high-margin API segment, a higher share of export orders, and scalability in the aftermarket segment orders would aid in margin improvement.
The company is currently undertaking capital expansion and gearing up its supply chain and sales network to drive future growth.
"We estimate strong revenue and PAT CAGR of nearly 28 percent and 32 percent, respectively, over FY22-FY25E. Further, nil debt, healthy cash balance, and strong return ratios give us comfort," said the brokerage firm.
Honeywell Automation | Target price: ₹49,750
Honeywell has multiple domestic growth levers such as the government’s infrastructure investments, including smart cities, airports, metros, railways, and ports over the next five years as well as growing automation demand from metals, healthcare, and cybersecurity segments.
Continued government spending on the country’s core infrastructure and development of large-scale data centres would help the company grow at a healthy pace going ahead.
As per the annual report, the company’s external order book has increased 31 percent year-on-year and the demand outlook remains robust for process and building solutions from all the key user industries.
An asset-light model (nil debt), strong cash position, healthy free cash flow generation, and promising long-term growth prospects in the automation space justify the stock’s premium valuation.
Further, supply-chain disruptions faced by the industry, especially for semiconductor chips and electronic components, are expected to ease. This shall boost revenue and earnings growth.
The brokerage firm expects revenue and PAT CAGR of nearly 19 percent and 37 percent, respectively, over FY22-FY24E.
Disclaimer: This article is based on a Sharekhan report. The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.