L&T, ABB, Bharat Electronics are 3 picks of Motilal Oswal in the capital goods sector ahead Q1 results

Stock Market Today: Larsen & Toubro , ABB, Bharat Heavy Electricals LTD (BHEL), Siemens , Bharat Electronics, others share prices have seen strong gains of up to 95% year to date with Siemens, ABB share price leading the gains.

Larsen & Toubro , ABB, Bharat Heavy Electricals LTD (BHEL), Siemens others share prices remain in focus on strong order book that is rising improving revenue visibility.

Strong order book adds to prospects

The strong order book has been one key reason why Foreign Portfolio investors have remained regular buyers in the capital goods stocks despite overall net flows by FPI's in equities remaining volatile.

During the recently ended April- June 2024 quarter that happens to be Q1FY25, analysts expect strong revenue growth led by execution of order book

“With strong existing order books, we estimate 12% YoY growth in execution in 1QFY25 for our coverage universe”, said analysts at Motilal Oswal Financial Services.

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Margins tailwind reduce but overall margins still improve

The margin trajectory remains to be watched for. The tailwinds to the earnings of the capital Goods manufacturers have been provided by the softening of input prices.

The input price nevertheless had seen some spike with base metals prices as those of Aluminium, Copper, Zinc etc rising on the London Metal exchange.

Analysts expect margins for Engineering Procurement and construction companies to be impacted by legacy projects. Larsen & Toubro already had trimmed the FY25 Engineering and Construction (E &C) margin guidance . Hence one will need to be watchful on margin trajectory. The product companies nevertheless may see cushion on margins being provided by the price hikes. Overall thereby the margin performance by various companies could be a mixed bag in Q1. MOFSL expects a 80 bps year on year expansion in Ebitda margin for companies under their coverage universe.

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Exports orders in slow lane but to catch pace

The slow down concerns in the global arena had been impacting global order flows of various manufacturers. The interest rates though are likely to have peaked and the global orders are likely to catch pace. Nevertheless for now the order flows in Q1 are likely to have remained impacted.

Analysts at MOFSL say that the product exports have been sluggish in most geographies due to factors such as inflation, geopolitical worries, and economic slowdown. Consequently, export growth remained tepid for companies including ABB and Siemens during FY24. MOFSL expects this weakness to continue for a few more quarters.

The order in flow pace to improve

The order flow outlook remains stocks and may pick more pace as we move forward. The Lok Sabha Elections are behind and the order flows that have remained softer in past few quarters may catch strong pace,

Q1 Key expectations

For 1QFY25, they estimate the coverage companies to report revenue growth of 12% YoY, EBITDA growth of 21% YoY, and PAT growth of 24% Year on year .

Motilal Oswal financial Services top picks in the sector are ABB, Larsen & Toubro and Bharat Electronics. ABB is expected to be the main winner from an enhanced addressable market for PLI-led expenditure, transmission, railroads, data centers, and short-cycle purchases from the private sector.

Larsen & Toubro will continue to gain from both foreign and domestic spending, as well as having better working capital management.

Because of its robust presence in the defense electronics market, capacity to increase sales and net profit at a mid-teens CAGR, and steadily rising return ratios, MOFSL likes Bharat Electronics.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions