Capital goods sector to see modest revenue growth, better margins in Q2

BHEL revenue to drop, ABB, Crompton Greaves, L&T to improve margins, say analysts

Capital goods companies are expected to report modest revenue growth but will see margin improvement in the September-end quarter, according to sector analysts.

While in the early part of the year the BSE capital goods index outperformed the Sensex, the sectoral stocks have corrected in the last three months in view of outlook of gradual economic recovery. In the first quarter, capital goods companies reported drop in sales but profit margins improved due to cost savings. Analysts believe that second quarter too will see muted revenue growth but margins will rise over the corresponding period last year.

Companies, including ABB, Crompton Greaves and Larsen & Toubro could see a rise in their margins. ABB is likely to benefit from fall in metal prices, while Larsen & Toubro results will report better margins, as Q2 FY 2014 result was impacted by Forex loss and higher other expenditure.  

While business sentiment has improved and grounded infra projects are back on track, the revenue growth of capital goods companies is likely to remain suppressed owing to weak order book and softer execution.

“With fewer orders and rising competition, the focus of capital goods companies has turned to cost optimisation and higher indigenisation measures to protect trough-level margins. Consequently, we expect our capital goods coverage universe to register a 80 basis points YoY increase in operating margin at six per cent,” Nirmal Bang Equity said in its results preview note.

Brokerages expect Bharat Heavy Electricals Ltd to report 12-16 percent decline in revenue due to shrinking order book and customer centric delays. Siemens sales growth is expected to contract due to execution delays.

Elara Capital expects aggregate level sales growth of 3 percent in six companies in the sector (ABB, Crompton Greaves, Cummins, Siemens, Thermax and Voltas) compared to second quarter of FY 2014.