Nomura has sounded the warning bells on the Indian industrial sector and expects it to slow down amidst poor execution and downward pressure on margins. It is bearish on L&T, Cummins India while optimistic on Adani Port & SEZ and Gujarat Pipavav Port

Nomura Equity Research is pessimistic on the industrial sector and expects the cumulative operating profit, excluding L&T, to decline 17.7% year-on-year (y-o-y) on the back of a 5% drop in revenues, owing to poor execution and margin pressure. The note said, “Particularly for L&T, we expect another quarter of weak revenue growth on the back of elongating execution cycle in exports, lower order book/bill ratio in exports as at the start of 2QFY14, and continued execution problems in domestic market (including impact from the all India sand mining ban).” Furthermore, Nomura is bearish on L&T, Cummins India while optimistic on Adani Port & SEZ, Gujarat Pipavav Port.
 

The note said, “We believe L&T could yet again disappoint on revenue growth (and hence on margins), as we believe the company's execution cycle has been rising due to a mix of longer-cycle orders from Building & factories segment and high-profile Rail/metro projects such as DFC and Riyadh metro. We also expect a negative impact from the all India sand mining ban. We expect 100bps compression in margins on back of lower operating leverage resulting in EBITDA de-growth of 2% y-o-y. We expect strong order inflow of approx Rs300bn in 2QFY14.”
 

Commenting on Cummins India, the Nomura said, “We expect a negative surprise from Cummins India on the back of revenue disappointment from the power generator segment. We expect a bigger decline in Cummins’ genset sales in 2QFY14 due to greater power availability from the Grid, low electricity demand, and low commercial real estate supply. However, margins could surprise positively on the back of INR depreciation benefitting exports. Overall, on y-y basis we expect EBITDA to de-grow 13.0% y-o-y. We expect management commentary on demand environment for 2H and cost control will be the key variables to watch.”
 

It is bullish on Crompton Greaves and said, “We expect a better quarter from Crompton Greaves as we expect sequentially stable margins in power systems and industrial business in domestic markets. In international business, we expect some benefits to flow in this quarter from company-specific initiatives taken in the past along with some improvement in macro environment in EU/US. In our view, management commentary related to improvement in international business will be the key factor to watch.”
 

Strangely, towards the final section of the report, showing the valuation, it has sought a “reduce” on Crompton Greaves despite being bullish in the report.