Capital goods firms, analysts hopeful for better order inflow

With awards of projects from government bodies and public sector utilities expected to increase this year, capital goods manufacturers are anticipating better order inflows.

Some analysts are expecting strategies adopted by capital goods companies to show results.

During 2016-17, order inflows for two of the major capital goods manufacturers were subdued. 

L&T reported 5 per cent growth in its order inflows, while BHEL reported a decline of 46 per cent.

In the case of BHEL, the decline is also due to an exceptionally high order inflow seen in 2015-16. L&T has given guidance for a 12-14 per cent rise in its order inflow.

BHEL, analysts say, is expected to finalise orders for around 10 GW. Others such as KEC International expect the order inflow to remain the same or higher than in the last financial year. 

Vimal Kejriwal, managing director and chief executive officer, KEC International, told investors the company could have an order inflow of Rs 12,000-13,000 crore.

A few analysts also expect a better year in terms of ordering activities. 

“The current financial year looks better in terms of order inflows, but it is also hoped that the expected orders will fructify,” said Sanjeev Zarbade, an analyst with Kotak. 

Zarbade said most of this would be government spends, including fertiliser projects and refining facilities.

“Utilities, like NTPC, that have not placed fresh orders in the last two years hope to see some ordering activity from them in the current year,” said a second capital goods analyst from a domestic brokerage firm.

The drivers of growth for each company are likely to be different. 

In the current financial year, some of these capital goods companies could adopt different strategies which would reflect on their order inflows. 

For L&T, both analysts and company officials, expect the defence business to contribute to the total order inflow along with the hydrocarbon and infrastructure sector. 

“The company is expecting Rs 10,000-20,000 crore from defence alone, which is huge,” said the analyst quoted earlier in the story. 

Similarly, analysts expect KEC International’s decision to venture into the railways segment to help margins and order inflow. 

“When they entered this segment, they were bidding at lower margins, having now stabilized I expect this segment to see better margins and additional revenue opportunities coming up,” said an analyst who did not wish to be identified.

For BHEL, improvement in executable order backlog is being seen as a silver lining. “The current slow moving backlog is at Rs 39,000 crore. 

The Yedadri project of Rs 18,000 crore is also expected to move into executable backlog post getting environment clearance. This would make the executable backlog Rs 84,000 crore within the next three months. These developments will provide much needed relief to Bhel as the projects entail execution cycle of two to three years. Beyond this, Bhel needs to bag large orders in financial year 2017-2018,” said Chirag Shah, analyst with ICICI Securities. BHEL’s executable orders as of March 31, 2017 was at Rs 66,000 crore.

Those like Thermax who saw most of the order inflow growth of last year coming from the overseas market; the trend is expected to continue. “We expect a 50: 50 ration of international and domestic orders, where international will be a larger pie from what the norm for the company has been,” said MS Unnikrishnan, chief executive officer and managing director, Thermax.  

However, analysts also see concerns for the company’s performance over commodity price fluctuations. “Contracts for the company do not have a price variation clause, which could make it vulnerable to commodity price fluctuations,” said the analysts quoted earlier in the story. Unnikrishnan however, does not expect it to be a big concern.