Stocks of private sector capital goods majors such as Siemens and ABB, which not long ago were investor favourites, have seen significant correction post the Covid-19 outbreak. Shares of ABB and Siemens are down 34-41 per cent from their January highs. Thermax and Cummins, too, have lost about 35 per cent during this period. However, the relatively lower order book/revenue ratio means that ABB and Siemens could face more heat, if the economic slowdown prolongs.
The lockdown has impacted most companies, especially in March, when new orders and execution, both gain momentum. This is visible in the quarterly performance reported by some of these majors.
ABB and Siemens, which are closest peers, saw revenues fall by 17-20 per cent in the March quarter. Analysts say, this is due the fact that the bulk of sales in March happens during the last fortnight. The companies are estimated to have lost Rs 350 - 400 crore of revenue each, in the March quarter due to the lockdown.
The impact on operating performance got accentuated as sales declined and fixed costs remained high. The two companies saw a 43-90 per cent year-on-year decline in operating profit and 46-78 per cent decline in profit before tax. Not surprising then, that Street sentiment has been significantly hit.
Fresh order inflows have also been lower than expected. ABB saw just a 10 per cent rise in order book. Current order backlog at Rs 4,444 crore is 0.65 times CY20 estimated revenues, indicating low revenue visibility. Thus, analysts at Emkay Research expect moderate- to severe impact in the medium-term for ABB.
ABB follows January-December financial year, and Siemens October-September.
For Siemens, too, a challenging environment for sectors such as infrastructure, auto and industrial capex has impacted its FY20 order inflows, which declined by 19 per cent year-on-year, say analysts.
An analyst at a domestic brokerage said that Siemens is a highly cyclical stock, due to the high correlation between the company's revenue growth and India's gross fixed capital formation. Moreover, both companies have a large share of short-cycle and/or low-ticket orders, which could hurt during times of slowdown.
Arafat Saiyed, analyst at Reliance Securities, agrees that there are more near-term concerns for companies such as ABB focussing on short-cycle higher return on equity orders. Comparatively, he is more confident on larger, more diversified players as Larsen & Toubro (L&T), which has higher visibility.
Going ahead, private capital expenditure (capex) is likely to weaken further while government spending on capex too may not support significantly looking at diversion of state funds for Covid relief and packages.
Recently, L&T's top management said that it does not see significant capex by private sector for the next 12 months at least.
But, its sizeable order book of over Rs 3 trillion provides good revenue visibility.
Naveen Kulkarni, chief investment officer at Axis Securities feels that the slowing capital expenditure cycle and execution headwinds will weigh on medium term prospects of ABB and Siemens.
With both stocks trading at rich valuations – Siemens at 47x FY20 estimates and ABB at 40x CY21 estimates – further underperformance is not ruled out.
Although Cummins and Thermax are yet to declare their March quarter results, Motilal Oswal Financial Services estimates their revenues to decline by 12-17 per cent.
Post the disruption, manufacturing facilities are, however, restarting. Thermax said that its international operations in Denmark, Germany, Indonesia and Poland had continued without major disruptions. With Europe resuming activities, these should help further.
However, uncertainties prevail for Cummins, which said that as the Covid-19 situation was still evolving, its future impact on operations could not be estimated.
Analysts feel that even as facilities are restarting, there will be cost pressures for all companies. Logistics costs will be higher and even companies may have to provide for employees' transport. Also, there are both supply and demand side disruptions.
The vendors are also facing labour availability problems. The travel limitations for executives, too, don’t bode well.
Umesh Raut at YES Securities, who also believes that slowdown in expansions and capex will hurt new orders and execution, says that companies supplying consumable industrial products like AIA Engineering may be better placed currently. Various industries such as cement, paper, etc, which are restarting operations, will require inputs from such manufacturers.
There is hope, for now, that post Covid-19, players such as ABB, Honeywell Automation and Siemens may benefit in view of the rising need for automation, feels Raut.