The engineering sector, buoyed by a robust capital expenditure (capex) environment, has hit the fast lane. High capacity utilisation across sectors, on the back of soaring domestic and international demand, has triggered a capex frenzy across sectors. Robust demand outlook, sound financial position, comfortable debt levels and easy availability of finance have made capital expenditure attractive.
With approximately 50% of the capex typically going towards plant and machinery, order books of engineering players are expected to swell significantly.
Even if the demand is partly met through imports, it still offers high-growth potential for Indian players. Though rising interest rates pose a concern in the medium term, we believe core sector investments are unlikely to slow down.
Strong earnings momentum on the back of soaring industrial capex (Rs 13,58,300 crore to be executed over the next 5-7 years) as also improving earnings visibility reinforces our faith on the growth prospects of engineering companies. Despite the run-up in stock prices, valuations are still attractive and we believe that significant re-rating opportunities still exists.
AIA Engineering: AIAE is benefiting from the robust investments flowing to the cement, utility and mining sectors. The company is also witnessing higher demand for high-chrome grinding media, used both as a consumable and for new projects. With aggressive capacity addition and firm realisations, AIAE’s earnings are expected to increase at a CAGR of 48.7% over 2007-9. The consumable nature of demand, coupled with leadership position, imparts high earnings visibility. We reiterate outperformer rating for the stock.
Elecon Engineering: Elecon has a diverse product portfolio of material handling equipment (MHE) and industrial gears. The company is benefiting from the huge capacity being created in core sectors, especially power. While the MHE division will drive future growth, leadership position in industrial gears would impart stability to earnings which are expected to register 40.7% CAGR over 2007-9. Reiterate outperformer with a price target of Rs 509.
Thermax: With a diversified product range catering to the core sectors, the company is making the best of the capex boom underway. Robust order backlog would drive an estimated 26.4% CAGR in the company’s revenues over 2007-9. We expect 34% CAGR in Thermax’s consolidated earnings on the back of higher revenues, operating leverage and cost cutting initiatives. Reiterate outperformer with a price target of Rs 548.
Voltas: Voltas, present in the high-growth cooling solutions segment, is growing briskly on the back of rising investments in the fast-growing domestic retail space and lucrative Middle East markets. We expect earnings CAGR of 31% for Voltas over 2007-9. We believe Voltas would continue to command premium valuations. Another outperformer rating.
