Capital goods companies expect to do well in Q1

Capital goods companies expect to do well in the quarter ended June, on the back of a robust show from heavyweights Larsen & Toubro (L&T) and BHEL. Mid-size companies, however, expect a modest rise in sales and decline in profit on slower growth in orders and increase in interest cost.

An analyst at Edelweiss Research says there is an improvement in liquidity, which has led to resumption of projects stalled due to lack of liquidity. Further, most companies in the sector are confident of a recovery in the second quarter of 2010.
 

QUARTERLY EXPECTATIONS: CAPITAL GOODS SECTOR
	Year-on-year growth rate in %
	Net sales	Op profit	Net profit
Larsen & Toubro	18.03	17.88	12.65
BHEL	23.04	50.53	30.82
Suzlon Energy	54.41	18.69	54.51
Siemens	6.73	-17.93	-17.34
Crompton Greaves	11.93	15.97	12.69
ABB	3.27	-7.02	-13.39
Areva T&D	22.38	-4.12	-13.98
Thermax	-3	-7.02	-8.61
KEC Int	13.64	25.33	-5.69
Jyoti Structure	16.24	9.82	4.08

The demand side in process verticals still looks weak and, hence, big-ticket project announcements have not been forthcoming. Order accretion in the power transmission sector has, however, been strong in the quarter. Profitability is expected to be robust, due to improvement in capacity utilisation and positives from lower commodity prices.

The sector is expected to post 18-20 per cent rise in net sales, while the net profit is expected to grow by around 13 per cent. Profitability could be robust for power equipment giants — BHEL and Larsen & Toubro — because of improvement in capacity utilisation and impact of lower commodity prices, copper and steel.

BHEL is expected to report a revenue growth of around 23-25 per cent and net profit growth of over 30 per cent. The operating margins are expected to go up by over 200 basis points, driven by lower provisioning for staff costs and the positive impact of lower commodity prices. L&T should be reporting an 18-20 per cent rise in net sales, while operating margins remain unchanged at around 9.75 per cent. Higher interest charges would dampen net profit growth to 5-20 per cent. The company would also book Rs 1,000 crore of extraordinary income on the sale of its 11 per cent stake in UltraTech and so, reported profit is likely to be up by over 200 per cent.

Crompton Greaves is likely to post a 12 per cent growth in net sales and profit. The operating profit is likely to move up by around 40 basis points, due to decline in cost of raw material. The key point of first-quarter results, according to analysts, is growth in orders and performance of international business.

According to CLSA Research, ABB and Areva T&D would witness a fall in margins owing to the changing nature of the product mix, coupled with increasing competitive pressures in the slowdown to win new orders. ABB expects to post a negligible rise in net sales, while net profit is likely to decline by over 10 per cent, primarily due to higher depreciation and interest expenses.

Suzlon, the wind energy major, should show higher sales and profit. The company expects to face margin pressures due to front-loading the start-up costs of its India expansion, and negative volume growth in the Indian market, its most profitable, say analysts at CLSA India Research.