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| Contributing to the order book: An NTPC power
plant in U.P. |
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OTHER RELATED STORIES
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If
there ever was a time when you could make good of a capital opportunity,
it's now. The economy grew at 7.5 per cent last year despite a
sporadic monsoon, and the outlook for 2005-06 is bullish at around
7 per cent (after factoring in a good monsoon). The feel-good
in the economy has been matched by the growth in industrial production,
with the Index of Industrial Production at 8.1 per cent, and capacity
utilisation at a high 79.4 per cent. Mere coincidence? Nope, say
analysts. "If the economy shows a sustainable growth, then
there is greater capacity utilisation, which is a factor of buoyant
demand," says D.K. Joshi, Senior Economist of rating agency
CRISIL.
In 1993-94, the capital goods sector saw
a boom under the stewardship of the then Finance Minister Manmohan
Singh (now Prime Minister), and again in 1996-97. And now, with
the government giving infrastructure its long overdue merit, the
capital goods cycle is on its way up again. Thrust on industrial
growth and higher capacity utilisation have resulted in brownfield
and to some extent greenfield expansions as well. And this time
around, both the government and the private sector are significant
players. Says Sachin Mathur, Head of Research, crisinfac, a business
research house: "The government has the big value investments,
but let's not forget the private sector in the pharma, FMCG and
auto industries."
The net effect of the industrial growth has
been a glut in the order books of leading capital goods manufacturers
and, consequently, their stocks look a good bet for the long term.
We handpicked six of the best that if you have, you should hold
on to for dear life, and if you don't have, buy into at the first
opportunity.
Capital Stocks
ABB: Why ABB? Simple, because it is
a key executor of power projects, a sector that is receiving continued
government support for reform. Analysts believe ABB, a leading
Swedish power and technology automation firm, is especially strong
because of its ability to leverage cutting-edge technology. ABB
India, viewed by its parent as an important centre for its global
exports as well as domestic markets, has recently been awarded
a turnkey automation project by Tata Steel worth Rs 60 crore,
while its Swedish parent has won an $80-million (Rs 352-crore)
order from NTPC (National Thermal Power Corporation) and PGCIL
(PowerGrid Corporation of India) to deliver extra high voltage
transformers and shunt reactors. Consequently, ABB is looking
at being extremely aggressive in India, and intends to pump in
$100 million (Rs 440 crore) to fund expansion plans. That's besides
setting up a global engineering centre in Bangalore, increasing
market penetration and targeting new revenue streams.
BHEL: If there's one reason why you
should consider BHEL (Bharat Heavy Electricals Limited), it is
that the value of its unexecuted order book (Rs 31,800 crore)
is thrice its current turnover (Rs 10,520 crore in 2004-05), which
means its earnings are pretty much covered for the next three
years. Need another reason? BHEL has a 70 per cent market share
in the power equipment industry. Then, name any major infrastructure
development project (the Delhi Metro, for example), and it is
unlikely that BHEL doesn't have a finger in the pie. This, despite
competition from global players. Gushes Priyanko Panja, Research
Analyst at investment management company Edelweiss Capital: "Their
margins never seem to go down." What works in BHEL's favour
is the cost advantage it enjoys owing to its vintage plants and
local availability of spares. The only negative is that collections
from loss-making power plants are on the lower side, and BHEL
doesn't have the latest technology in its stable. But with the
spend on infrastructure projects rising, things look bright for
BHEL.
Crompton Greaves: Unlike ABB or BHEL,
Crompton Greaves is not a turnkey projects player. But what works
in its favour is the company's presence, in terms of component
supplies, across sectors such as power, railways and telecom.
A manufacturer of components such as motors, generators and transformers,
Crompton Greaves is likely to be a major beneficiary of corporate
capital expansion. Analysts reckon gas circuit breakers and interrupters
will provide a bigger revenue stream to the company in the short
term. Crompton Greaves has also shown an appetite for the global
game with the acquisition of Pauwels Group, a Belgian transformer
manufacturer, in February 2005 for Rs 180 crore. It's a move that
will give it access to the US market.
Larsen & Toubro: Second only to
BHEL in the value of its unexecuted order book (Rs 16,701 crore),
Larsen & Toubro (L&T) is conspicuous by its presence in
turnkey projects across all major sectors. Be it the Mumbai Suburban
Rail project or deep-sea exploration projects (for oil) from ONGC
(Oil & Natural Gas Corporation), L&T does it all. A company
with a reputation for fast turnaround times, L&T recently
won a Rs 930-crore contract with ONGC for offshore renovation.
Says Panja of Edelweiss Capital: "When it (L&T) is not
winning orders, it is leading consortiums." This approach
has helped the company develop capabilities in areas such as deep-sea
exploration, airports, ports and power plants. And with the government
taking a long, hard look at upgrading port infrastructure (a task
that will require more than Rs 1,00,000 crore), L&T looks
set to strike it rich.
Siemens: Siemens likes to position
itself as a "single-window solutions provider". This
Germany-based company specialises in energy, transportation and
healthcare, and in India its volume drivers are power, automation,
transportation and healthcare. Analysts see in Siemens an aggressive,
almost ruthless drive to grow in India, and given the orders it
has been receiving, it seems well on its way. Among the orders
it has bagged recently is one worth Rs 147.5 crore from PGCIL
to provide turnkey substations for a transmission project at Seoni
in Madhya Pradesh. It is on the lookout for opportunities in the
oil and gas sector, and also has in hand orders from the railways,
such as the Neyveli expansion project. A strong technology player,
Siemens can be on the slightly expensive side in terms of valuation
(it has been trading around the Rs 1,800-1,900 mark on the BSE),
but is certainly a long-term bet. So go for it if you have the
patience.
Thermax: A leader in the manufacture
of industrial boilers, the capacity expansion spree in industries
like steel, copper, zinc, paper and chemicals bodes well for the
order books of this Pune-based company. Besides boilers, Thermax
provides "solutions" in the areas of water management,
waste management and air pollution control, all of which have
excellent growth potential. The company has been doing well on
the order book front lately. One of the orders (worth Rs 93 crore)
it bagged recently was from Lafarge to set up a captive power
plant. Analysts reckon Thermax could face a few pressures on its
operating margins due to increased prices of raw materials, but
its fundamental growth is sound.
If there's any area of concern, it is that
timelines for payments are sometimes not strictly adhered to.
So the numbers on its order book may not immediately translate
into revenues. But then, that's a long-term concern. Like those
of the other five stocks, Thermax's growth engine at the moment
is humming quite nicely.
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