Mid-cap infra, capital goods players to fare better in Q3

While the outlook for large companies in the capital goods and infrastructure segment (BHEL, L&T) may be on weak footing, prospects appear bright for their mid- and small-cap peers such as KEC International, IRB Infrastructure, Sadbhav Engineering and KNR Constructions.

Optimism emanates from a steady pick up in order awards of government agencies such as National Highway Authorities of India (NHAI) and Power Grid Corporation of India (PGCIL).

Orders awarded by NHAI year-to-date stood at Rs 32,100 crore (up 71% year-on-year), with road projects totaling to 2,733 kilometers (Rs 33,000 crore of orders) pending at various stages of bidding.

Likewise PGCIL has awarded orders worth Rs 12,130 crore in this period (up 24%) for power transmission and distribution (T&D) players.

Analysts remain positive on road construction and power T&D players even as stock impact on order wins has waned off in the last one month (three to 10%) for companies such as PNC Infratech, IRB Infrastructure, Gayatri Projects and Kalpataru Power Transmission.

Amit Mahawar of Edelweiss Securities says that order intake is correlated with earnings per share and expects companies in the EPC segment to fare better in Q3 FY16. "These companies have been benefited from government's capex spends and are not dependent on capex of private companies," he adds.

Analysts expect companies in the T&D space to report nine to 11% revenue growth while that of road contractors may expand by by 12 to 14 per in Q3 FY16. Margins too may fare better than last year's primarily due to pick-up in pace of project execution.

That said, competition in the sectors and price cut resorted to by a few players to secure L1 (lowest bid) position may keep the margins in Q3 FY16 just in-line with that of September '15 quarter. Nevertheless, interest cost is what the Street would take note of in December '15 earnings.

Teena Virmani of Kotak Securities is of the opinion that profitability of these companies would depend on debt reduction. "Companies which managed to reduce their debt would emerge better this earnings season," she says. Agreeing with her, Mahawar feels that working capital cost could continue to be a burden as these companies start servicing larger projects.

Virmani believes that the important trigger for these mid-cap stocks would be order inflows and debt reduction plans such as land monetisation, asset sale and securitisation.