Sector update: Engineering - Capex – Overall weakness continues; uptick in private sector
Our analysis of CMIE data showed continued weakness in new project announcements, which fell 22% yoy and 35% qoq to Rs2.05trn in Q1FY19. The depth of project announcements too was weak with 64% of the announcements for aircraft orders (Jet Airways). During the quarter, project announcements by government declined 79% yoy to Rs245bn, lowest in over a decade (12% share in announcements), while private project announcements rose 24% yoy to Rs1.8trn. Project completions declined 21% yoy to Rs686bn. The silver lining was 1% yoy decline in projects stalled, though it remained elevated at 11% of projects under implementation (vs long run average of 7%). Similarly, projects under implementation rose 2% yoy, led by transport segment (+6.6% yoy, led road and rail).
Most lead indicators improved in Apr/May 2018 (except diesel consumption) boosted by revival in demand and a low base. Prices of end products exhibited mixed trends with prices of steel, aluminium and polymer products rising and cement and copper declining. With disruptions related to GST, e-way bill largely behind, we expect a gradual recovery in domestic capex, going forward. As a result, we prefer Voltas (structural AC industry growth), Engineers India (play on hydrocarbon capex revival) and Bharat Electronics (defence capex beneficiary).
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