Top Stock Picks: 4 Engineering & Capital Goods Stocks To Buy Ahead of Q4 Results

For the domestic brokerage firm ICICI Securities, L&T (Target Price: Rs 2,350), Siemens (Target Price: Rs 2,598), KEC International (Target Price: Rs 613) and GE T&D (Target Price: Rs 132) are among the top picks with buy rating from Engineering and Capital Goods space.

As per ICICI Securities "We expect execution for both EPC and product companies to pick up further in Q4FY22 with strong demand and resumption of stalled projects. However, margins are likely to be flat or under pressure due to sharp rise in commodity prices, supply chain constraints and higher logistic costs. By and large, ordering activity has been slow and below our expectations due to uncertainty in cost economics. However, certain pockets in the domestic market, e.g., civil infra, power T&D, railways and water, witnessed traction. We expect order finalisation in overseas markets to slow down due to geopolitical issues, which have led to current volatility. Nevertheless, the tender pipeline remains very healthy."

The brokerage has claimed that "We factor in revenue growth of 9% YoY / 30% QoQ in Q4FY22E for our coverage universe, given pick-up in domestic execution pace. Due to pressure on margins, EBITDA/PAT growth is expected to be 2% / 6% YoY (ex-BHEL). Our top picks are L&T, Siemens and KEC International. We are also positive on GE T&D on expectation of improving performance and order inflow, which would be mainly from T&D capex under the RDSS scheme and expected ordering of Rs800bn for Green Energy Corridor."

On the sector outlook, the brokerage has said "Over the near to medium term, we remain positive on domestic capex story with the Indian government's infra push. Also, multilateral-funded projects such as metro, roads and 'China plus One' are witnessing strong traction. In the global markets, inflation is at record high driven by pent-up consumer demand for goods following the reopening of the economy in CY21, supply chain disruptions and sharp rise in energy prices due to Russia-Ukraine war. We believe companies exposed to overseas markets could see delay in ordering, while the ender pipeline remains strong."

"Over the past decade, hydrocarbon sector registered moderate capex trend. According to IEA, annual investment in upstream hydrocarbon peaked at ~US$780bn in CY14. Since then, the highest annual spending was at US$483bn (~62% of CY14 levels) in CY19. The moderate spending was on the back of growth in US shale. Covid and the corresponding slowdown in global economies further led to decline in spending - estimated at around US$320bn in CY20. There are initial signs of revival in capex, which we expect will show further uptick led by: 1) global GDP (expected to recover fully post covid); 2) sharp recovery in crude oil prices due to higher demand for mobility; and 3) moderate capex in the previous decade. In our coverage, we expect L&T / Engineers India to benefit with revival in global hydrocarbon capex, especially in the Middle East," claimed ICICI Securities in its report on April 14, 2022.