Changing fortunes: Margin visibility, capex boost aiding engineering stocks; what to buy?

The continued investments by the government to bolster domestic growth helped industrial and engineering companies put up a stellar show in the December quarter.

In the midcap and smallcap space, companies like Apar Industries, Bajaj Steel Industries, KPI Green Energy, Lloyds Steels Industries, Mold-Tek Technologies, MTAR Technologies, Permanent Magnets, and Anup Engineering have seen both profits and revenue more than double YoY in the December quarter.

The other highlight for the quarter was the operational performance, as some companies saw profitability grow at a faster pace than revenue.

The aggregate growth in operating profit of companies that Jefferies covers in the engineering sector was 20% on year, while revenue grew by 14%.

“Operating leverage and partly commodity prices cooling off drove this performance. We believe this should play out even over the next 4 quarters, as revenue growth remains intact,” the brokerage said in its report.

Besides profitability, some of the companies saw strong growth in the order wins, which improved visibility for both order book and revenue.

While Voltas reported a sharp 532% YoY rise in order inflows in the engineering division, sector major Larsen & Toubro saw a 21% YoY growth.

The outlook for the domestic market remains positive given the strong capital investments budgeted by the government in the Budget for FY24. Therefore, domestic-growth oriented companies remain in a more favourable spot, according to analysts.

However, the slowdown in major global economies poses risk to the export order book.

“The challenge lies in the outlook…industrial companies’ orderbook prospects heavily hinge on global growth. This is because industrial cycle is dependent on demand, prices and liquidity cycle – all of which are heavily influenced by global factors,” Nuvama Institutional Equities said.

What should investors do?
Out of the 10 industrial stocks that Jefferies covers, 8 of them are a “buy” for the brokerage, and these include L&T, ABB India, Voltas, Siemens, Bharat Electronics, Thermax, Blue Star, and KEI Industries. Even for Nuvama Institutional Equities, L&T, Siemens, and Bharat Electronics are its top picks in the sector given the better earnings growth visibility.

Being bullish on the sector, brokerage Motilal Oswal Securities has estimated a strong 29% YoY growth in the profits in FY23, compared to the 24% growth in FY22.

“In the infrastructure space, we recommend Larsen & Toubro as our favourite. The engineering major has a robust orderbook and is seeing regular strong order inflows apart from maintaining healthy margins despite raw material cost fluctuations,” said Anmol Das, head of research, Teji Mandi Investments.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)