Dark days ahead for ABB, Siemens

Top three challenges are steep fall in orders from China, slowing demand for renewables and severe pricing pressure

There seems to be no end to the chain of negative news for the capital goods sector. Order inflow has fallen drastically both in India and China. A sharp slowdown in China is bad news for India, as any Indian demand will be very aggressively priced, leaving very little on the table for capital goods providers.

In a report on the result analysis of ABB Ltd and Siemens AG, Standard Chartered has said that there has been a sharp decline in order inflow from China. China seems to hit the brakes as ABB order inflows have slowed down by 35% in March 2012. Within the overall order book, power product orders declined 56% y-o-y. Siemens, on the other hand, has seen orders slow down by 12%. In India, however, order inflow for Siemens crashed by 58%.

Going by the quarterly numbers of power transmission giants Siemens AG and ABB, the immediate future for the T&D segment appears challenging. The latest quarterly results of these two companies reflect some common underlying challenges which threaten to play spoil sport for the coming quarters.

The top three challenges are sharp decline in orders from China, slowing demand for renewables and severe pricing pressure. These observations don't bode well for their Indian counterparts such as Crompton, ABB and Suzlon which is into renewable turbine manufacturing.

Margin shrinkage is visible. ABB's profitability in 1QCY12 would remain under pressure due to increased completion, execution of low- margin fixed price contracts and rising commodity prices.

Though some state electricity boards (SEBs) have increased power tariffs, they have not yet started placing orders. SEBs is carrying losses of nearly Rs 1 lakh crore in their books and few analysts expect them to order new equipments.

As for new power plants, fuel linkages and environmental clearances are keeping power producers away from placing orders.

Even if new orders will be there  will be little margin in it for manufacturer as was visible in the long awaited NTPC order, which was bagged by BGR Energy consortium on single digit margins.

Looks like the darkness will continue longer for companies that light up our homes.