Gloom to continue for capital goods companies

Analysts say higher govt spending & faster clearances to pending projects might help in Q4

The capital goods sector will continue to show weakness in the third quarter because of fewer orders and lower margin growth, say analysts.

Religare Institutional Research has said revenue growth in the capital goods and infrastructure sectors would remain weak, particularly for companies making power-generation equipment. Consequently, growth in margins will continue to remain low with Ebitda (earnings before interest, taxes, depreciation and amortisation) margins falling 138 basis points to 10.3 per cent, it said. (A basis point is a hundredth of a percentage.)

While Religare expects revenue to fall three percent year-on-year and profit 26 per cent for capital goods companies, Emkay Global Financial Services forecasts a one per cent and 13.7 per cent decline, respectively.

Analysts expect Bharat Heavy Electrical (BHEL) to post weak results in the quarter ended December. The country’s largest power manufacturer had reported a 64 per cent drop in net profit in the previous quarter, with fewer orders and higher operating costs. The stress is likely to continue. Kotak Institutional Equities Research and Religare are respectively expecting a 15 per cent and 17 per cent lower revenue year-on-year for it.

“The second quarter was marginally better for India Inc, given the festive season. Business sentiment and the macroeconomy in the third quarter was muted. For capital goods sector, the third quarter will remain weak. Capacity use in industries remains below optimum. We might see some green shoots in order inflows in the fourth quarter due to higher government spending and accelerated clearances of pending projects,” said Tirthankar Patnaik of Religare Institutional Research.

Another analyst said: “We do not see any visible signs of recovery. There has been some reform like restructuring of power distribution companies. However, there is not much investment or capital expenditure under way in the energy and highway sectors.”

Karvy Stock Broking expects BHEL to improve performance over the past quarter despite an estimated 11 per cent drop in revenue. The brokerage firm expects a rise in ABB’s bottom line due to better project execution, cost savings, indigenisation and supply chain restructuring. The electrical equipment industry is facing “unmanageable cash-flow problems” due to a credit crunch, delays in project execution and delayed payments.

Larsen & Toubro (L&T) is expected to buck the trend. Emkay expects L&T to report an 11 per cent growth in revenue in the third quarter and an increase of 56 basis points in margins to 10 per cent. Analysts expect the company to close the quarter with orders worth Rs 20,000 crore, higher than estimates. In contrast, India Infoline Research says L&T’s net profit would fall 4.6 per cent and margin 26 basis points due to the larger share of international projects among its orders.