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Tuesday, Mar 01, 2005

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Industry & Economy - Engineering

Slew of positives

ABB, Siemens, Crompton Greaves, Larsen & Toubro, Gammon India, IVRCL Infrastructure, Hindustan Construction, Kirloskar Brothers and Praj Industries: these are some of the more prominent stocks from the engineering and construction sector that have been star performers in the bullish markets since July 2003.

The bullish undertone could well be maintained, as the Budget has been positive for these sectors.

The reduction in tariffs on capital goods, the correction of the inverted duty structures and the lowering of tariffs on non-ferrous metals are bound to be an across-the-board positive for the engineering sector. The infrastructure push - the setting up of a special purpose vehicle may be added pep — is likely to open up revenue growth opportunities that could span several years. A healthy addition to an already robust order book position is on the cards. Here are the thrust areas that could prime growth for engineering/construction companies:

  • The thrust on infrastructure - especially roads - is set to continue. The National Highways programme could get a boost with the hike in funding, as the cess dedicated for this purpose on petrol and diesel has been increased.

    Outside of the Golden Quadrilateral and N-S-E-W corridor projects, a third major national highways plan has been announced to cover roadways not connected by the other two. This is likely to be positive for the likes of L & T, Nagarjuna Construction and Hindustan Construction.

  • The focus of irrigation projects outlined in the last Budget is likely to gather further momentum as this has been identified as a crucial part of the Government's plans to give rural growth a push. One-lakh hectares are to be brought under assured irrigation. This, coupled with the focus on expanding the drinking water and sanitation networks, is likely to be a positive for companies such as Kirloskar Brothers, KSB Pumps and IVRCL Infrastructure.

  • Engineering companies that operate in the power space could get a substantial upside from the focus on rural electrification as the Government plans to put in place a backbone that covers 1,25,000 villages.

    Players in the distribution and transmission businesses such as ABB, Siemens, Jyoti Structures, KEC International and Crompton Greaves are bound to be beneficiaries.

  • The reduction in import tariffs on textile machinery is unlikely to pose a serious threat to revenue growth of Lakshmi Machine Works (LMW). LMW has a competitive cost structure, a comprehensive product range and well-established track record of winning orders by competing with MNC majors. Smaller players such as Veejay Lakshmi Engineering may be subject to a higher degree of vulnerability.

    Voltas may be a beneficiary as it trades in imported machinery; but the upside is not likely to be significant in the context of the growth across its other businesses.

  • The stress on improving the agricultural marketing network and likely fiscal measures on the sugar industry could prove positive for the likes of Alfa Laval and Praj Industries.

  • In the residential construction domain, the imposition of a service tax on complexes with more than 12-dwelling units is likely to be a pass-through and not have a dent on the fortunes of builders.

    There may be resistance in the initial days, but this is likely to become an integral part of pricing, as have other services taxes. The likes of Ansal Housing, Mahindra Gesco and Unitech are unlikely to be affected. Companies such as ABB, Siemens, Alfa Laval and Sesa Goa (which is in the business mining and exporting iron ores) are likely to receive a boost to earnings from the reduction in corporate income-tax rates.

    S. Vaidya Nathan

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