Strong Q2 seen for capital goods companies as project execution picks pace

The capital goods companies are expected to deliver strong performance in September quarter (Q2 FY22) as on-ground order executions are seeing recovery.

This is helped by the easing of the second wave, and as a result ironing out of supply chain issues, improving labour availability as vaccination picks pace and timely customer collections.

“The September quarter revenue for companies under our coverage are expected to grow by 11 per cent year-on-year, with a fading base effect. Also, the aggregate EBITDA (earnings before interest, taxes, depreciation and amortisation) is expected to increase by 23 per cent year-on-year with execution nearing pre-Covid levels on account of opening up of the economy during the quarter and higher operating leverage,” said analysts at Motilal Oswal Securities in a report.

Labour migration is an issue of the past as most sites are operating with adequate workforce strength upon strong vaccination drives, said brokerages.

Backed by government orders in sectors such as the Railways (conventional rail/metro-rail/RRTS/HSR), water, real estate, data centres, oil & gas, chemicals and pharmaceutical, ordering has been healthy domestically, said analysts at Anand Rathi in a report.

Internationally, sectors such as power transmission & distribution (T&D), the Railways, and oil & gas have been showing traction especially from regions such as the Mid-East, SAARC and Africa. Some private sector capex has been delayed because of higher investment costs (rise in raw material prices). We expect Larsen & Toubro (L&T) to report order inflows of Rs 22,500 – Rs 25,000 crore, it said.

Meanwhile, margins may be impacted for some companies to an extent because of higher raw material prices as companies are finding it difficult to pass on the cost increase through price hikes due to fixed-price contracts, customer resistance or competition, analysts say.

Cost pressures seem all pervasive – be it fuel, electricity, metals, semiconductor, cement or seaborne container freight, said Axis Capital report.

For India’s largest engineering company, analysts at Motilal Oswal Securities said: "We expect consolidated revenue for L&T to grow by 8 per cent year-on-year, with the core business expected to grow by 7 per cent year-on-year in the September quarter."

Interestingly, according to brokerage estimates, the majority of companies are expected to post an improvement in net sales, EBITDA and net profit, both sequentially and year-on-year. And, that’s true for L&T.

Relatively a much smaller player, Thermax is also expected to post higher operating profit compared to last year, on account of higher operating leverage year-on-year and pick up across key end-markets, said analysts. Sequentially, too, its performance is estimated to improve sharply.

A few though are estimated to witness margin pressure in the September quarter. KEC International is expected to post flat EBITDA on a year-on-year basis on moderation in margin due to elevated commodity prices and cost escalation in the SAE business (subsidiary of KEC), a report by Motilal Oswal Securities said.

For Cummins, the EBITDA margin is expected to shrink 293 basis points year-on-year to 13.5 per cent on account of higher raw-material cost in the September 2021 quarter and exceptionally lower staff cost due to the pandemic in the year-ago period, said brokerage Anand Rathi.

Going ahead, brokerages are expecting order momentum to pick up in the second half of FY22 and would be one of the key monitoring points for the sector to ensure sustained growth.

"With central elections coming up in Q1 FY25, we expect strong ordering momentum to build up in H2FY22/23," said HDFC Securities.