Dec 29, 2003|
Engineering: Great year 2003
Empowered by the reforms in Indian power sector, infrastructure spending by government, higher industrial activity leading to 6.5% growth in IIP (index for industrial production) and huge order inflows, 2003 has been a great year for engineering companies. Returns given by major engineering stocks were much higher as compared to the BSE-Sensex. Due to healthy order inflow, the topline of the engineering majors saw double-digit growths. However, due to higher operational efficiencies, the bottomline grew at an even faster rate.
As can be seen from the graph above, Rs 100 invested in BSE-Sensex would have fetched around Rs 156 in 2003, where as Rs 100 invested in stocks like Bharat Electricals, Siemens, BHEL and ABB would have resulted to Rs 321, Rs 276, Rs 263 and Rs 246 respectively. Thus, we see that engineering majors outperformed BSE Sensex convincingly.
BHEL, the largest engineering company witnessed order inflow of more than Rs 150 bn in last one year, (around 2 times FY03 revenues). Power remained as the major contributor in the orderbook. However, BHELís industrial segment also showed good results due to the spurt in the industrial activities domestically. The company plans to increase its export contribution to total revenues from current 13.5% to 17% by FY07.
Siemens posted good results for FY04 (September ending). Siemens also increased its holding in one of its subsidiaries, Siemens Information System Ltd. (SISL) from 74.8% to 100% in FY04. So on consolidated basis, the companyís valuations looked attractive as compared to its peers. As a result, the stock gained substantially in last two months of 2003. The company believes that the key growth driver for next five years will be health care equipment business. However, this segment failed to post good results because the management decided to write off one time charges, which is not recurring in nature.
ABB on the other hand gained due to good order inflow and better prospects for the T&D segment in Indian power sector. The companyís 9mFY04 performance remained satisfactory with around 18% increase in topline and 30% increase in bottomline. The company has received orders worth Rs 12.5 bn during 9mFY04, registering an increase of 34% YoY. The company is currently focusing on taking advantage of the APDRP (accelerated power development reform program), as its success could translate into higher orders from the T&D side. So, in ABBís case, we expect a steady growth in the orderbook size going forward.
Looking at the sufficient orderbook size, the outlook for these engineering companies remains positive. As power reforms gain momentum, new orders from both power generation and T&D segment will add to the existing orderbook sizes. Letís have a look at the correlation between Indiaís GDP growth and topline of the major companies.
The graph above shows a high degree correlation between GDP growth and change in the topline of major engineering companies. India is expected to achieve 7% growth in GDP in FY04. If this rate of growth can be sustained, we can build high expectation from the engineering sector companies. However, looking at the valuations of the engineering companies, it seems that a bulk of future growth has been factored in at the current price levels. From here on, the risk reward ratio seems unfavourable for the retail investor, atleast over the next one year.
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