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Engineering & Capital Goods, Infra

Share Written By
Abhineet Anand

Senior Research Analyst

11 Jul 2022

Project announcements

FY22 saw a very strong uptick in fresh investment announcements – ~78% growth over FY21. The sharp increase in fresh announcements was driven by announcements in both traditional sectors (steel, cement, petrochemical and automobiles) and sunrise sectors (electronics, e-vehicles, battery, data centre and solar power). A large part of the surge in fresh investment announcements has been from the private sector. The share of private sector in overall fresh investment announcements has increased from ~40% in FY19 to ~69% in FY22. More than 90% of the increase in announcements in FY22 vs. FY21 has come from the private sector. Further, there has been a share increase in manufacturing (more private sector driven) vs. infrastructure. Growth in prospects (tenders) continues.

The strong tendering trend seen in FY22 continued in Q1FY23 as well. In Apr-Jun’22, tenders grew by 90% YoY at a 4-year CAGR of 13%.

In FY22, one of the key trends was that while tenders maintained a decent growth rate, awards saw a lag. H2FY22 recorded strong tendering (ex-Roads) growth of 46% YoY. We believe that the improvement in awarding activity in Q1FY23 is a result of strong tendering last year. Railways, Water, Roads, Power Equipment and Power T&D have seen strong tendering activity in Q1FY23. The tenders-to-awards conversion rate stood at 60% in Apr-May’22 vs. 46%/52% in FY22/FY21. Strong awarding in Q1FY23

Awarding activity was very strong in Apr-Jun’22, with 190% YoY growth and a 4-year CAGR of 9%. Among the sectors, Railways, Water & Irrigation and Power Equipment (Solar EPC) saw strong inflows in Apr-Jun’22. Growth in Railways was driven by large wagon orders to Titagarh and Texmaco (Rs78bn and Rs65bn). Growth in Power Equipment was driven by solar EPC orders. Growth has been broad-based. Awards (Q1FY23) in the Road sector accounted for ~18% of the total orders vs. 22-25% in the last few years. Budget data of key states point to double-digit growth in capex

An analysis of the budget data of more than 20 states indicates that capex is expected to grow by ~20% YoY in FY23 vs. FY22RE, although states have in general missed budget estimates by ~10%. The budget estimates of Centre+IEBR+States point to 8- 10% growth in FY23. In Apr-May’22, the Centre spent ~Rs1,070bn (up 70% YoY at a 4- year CAGR of 14%), 84% of which on Roads/Railways/Defense (38%/31%/16%). Credit to industries grew at ~10% YoY while infra at ~11%

Credit to industries has steadily risen in the last year, after being flat for a few years. Credit to industries/infrastructure has grown by ~10%/~11% YoY. Roads and Power growth rates have been ~18% and ~9%, respectively. Credit to industries as a percentage of overall non-food credit still remains very low at ~26%. Our view

We maintain Buy on L&T (TP: Rs1,960), KEC (TP: Rs495), KPTL (TP: Rs500), HG Infra (TP: Rs820) and ACE (TP: Rs240). The correction in the prices of steel and other base metals would be positive for these companies from a margin perspective. Strong order inflow remains a key driver of our positive view on the sector. We have cut our TP of LT from Rs2,160 to Rs1,960 to factor in the lower valuation of IT subsidiaries (Rs754/share from R955/share). IT valuations are aligned to Emkay’s target prices of these companies.