4 Stocks To Buy From The Engineering, Capitals Goods And Infra Space

Emkay Global has come out with its latest report on the capitals goods, infra and engineering space. The firm has looked into sales/PAT growth, gross margin, EBITDA margin and net profit margin expansion/contraction on a YoY/2-year CAGR basis (FY22 over FY21 and FY20). The report also highlights order book growth and future tendering prospects.

Stocks to buy from the space according to Emkay Global

According to the firm, L&T, target price Rs 2,160, KEC target price Rs 495, KPTL target price Rs 500 and HG Infra, target price of Rs 820 are the top picks in the sector.

"LT, ex-services, trades at 16.5x FY24E EPS, assuming current price (with 20% discount) for all the listed IT and finance subsidiaries. Short-cycle engineering companies such as Siemens, ABB and Cummins have shown strong revenue momentum in the recent past," Emkay Global has said.

Sales and net profits growth

According to Emkay Global, on the sales front, Defense/Infrastructure companies (2-year sales CAGR of 6-8%) fared better than Capital Goods companies (2%). HG Infra (28%), KNR (21%), JMC (20%), ACE (19%), GR Infra (15%), PNC (14% and Carborundum (13%) showed strong execution, while IRB (-19%), Capacite (-7%), KPP/BDL/Cochin/ISGEC were still well below their respective FY20 sales," the firm has said.

At the PAT level, Defense companies saw a 2-year CAGR of 21%, while Capital Goods firms saw 14% growth over FY20 profitability. Infrastructure firms saw a negative 2-year CAGR of 6% due to the poor performance of Dilip Buildcon (excluding Dilip, it would have been 1% growth) and lower margins across several of the Infrastructure companies.

Order book: 12%; 2-year CAGR

According to Emkay Global, as of FY22-end, the companies saw a 2-year CAGR of ~12% in the order book. Defense/Infrastructure companies saw a 23%/15% rise (2-year CAGR) in their order book. Order book growth for Capital Goods companies stood at 7%.

"JMC Projects (34%), KNR (31%), PNC (30%), Thermax (30%) and HAL (25%) were the clear winners in terms of order book growth from a 2-year CAGR perspective, while IRB, NCC, Ashoka, Apar and Triveni Turbine fared well. The laggards were Mishra Dhatu, Cochin, Capacite and GR Infra," the firm has said.

Defense companies

Defense companies posted a positive EBITDAM over 2-year basis (43bps). Capital Goods companies saw a marginal decline in EBITDAM (29bps on a 2-year basis) as these companies managed staff and other expenses well. Infrastructure companies saw 182bps EBITDAM contraction, and hence the worst among the lot.