There has been an improvement in sales and profits of companies working in the infrastructure, capital goods and defense sectors. His performance has come close to the prekovide level.
Best Stocks to Buy: There has been an improvement in sales and profits of companies working in the infrastructure, capital goods and defense sectors. However, margins remain under pressure due to high commodity prices. Compared to the precovid level, the order book of companies is getting stronger again. Brokerage house Emkay Global has given investment advice from these sectors, expressing confidence in stocks like L&T, KEC, KPTL, HG Infra. These companies have outperformed on the profit, sales, margin and order book front.
Margins under pressure due to costlier commodity
The margins of the sector have been affected due to higher commodity prices. Overall, the gross margin of these sector companies has decreased by 70bps on a yearly basis. There has been a decrease of 123bps in 2 years. However, due to cost control, the EBITDA margin has reduced by only 65bps in 2 years. There was a growth of 58bps in NPM.
The impact of higher commodity prices was more on the infra and capital goods segment. That the defense companies were able to manage it. The EBITDA margin of defense companies has increased by 43bps on a 2-year basis. During this period, the EBITDA margin of capital goods companies has decreased by 29bps. While the EBITDA margin of infra companies has decreased by 182bps.
how was the sales growth
According to the report of brokerage house Emkay Global, in terms of infra and engineering capital goods companies, in FY22, sales growth has been 17 percent on a year-on-year basis. Compared to the precovid level i.e. FY20, the CAGR of 2 years has been 4 percent. Whereas PAT has grown by 21 per cent on a yearly basis and the 2-year PAT CAGR stood at 12 per cent.
On the sales front, defence/infra companies (2 year sales CAGR 6-8%) outperformed capital goods. Sales growth was HG Infra (28%), KNR (21%), JMC (20%), ACE (19%), GR Infra (15%), PNC (14%) and Carborundum (13%). While growth was negative in IRB (-19%), Capacite (-7%). The sales growth in KPP, BDL, Cochin and ISGEC has been weak as compared to the pre-COVID levels.
How was the profit of the companies
The 2-year CAGR in defense companies at the level of PAT was 21 percent. Whereas capital goods grew at 14 per cent as compared to FY20. The 2-year CAGR of infra companies was weak. Dilip Buildcon’s performance has been very weak.
How was the order book of the companies
The 2-year CAGR growth in the order book of defense and infra companies till the end of FY22 has been 23 per cent and 15 per cent. While the order book of capital goods companies grew 7 percent during this period. Talking about different companies, JMC Projects (34%), KNR (31%), PNC (30%), Thermax (30%) and HAL (25%) are showing clear winners with growth. While IRB, NCC, Ashoka, Apar and Triveni Turbine also got decent orders. But in this case, Mishra Dhatu, Cochin, Capacite and GR Infra were left behind.
These stocks can show bullishness
L&T (TP:Rs 2,160)
KEC (TP:Rs 495)
HG Infra (TP:Rs 820)