India Inc finally arrests declining trend in order flows
India Inc has finally arrested the declining trend in order flows, with an 18 per cent quarter-on-quarter (QoQ) growth in the third quarter (ended December). The growth was led by strong orders registered by power equipment manufacturers.
Sequentially, the inflow of orders had declined 22.3 per cent in the second quarter and 6 per cent in the first. On an annual basis, the flow of fresh orders declined 4.7 per cent in the December quarter, but the pace of decline slowed when compared to the 24 per cent in the previous quarter.
Power equipment makers, reporting strong addition to their books, got orders worth Rs 17,790 crore in the third quarter, up 138 per cent over previous (September) quarter, but still five per cent lower on an annual basis. Order inflows in capital goods, engineering and construction segments remained flat on a sequential basis, but were down over 15 per cent annually. The priority to build roads for better transportation remained at a low ebb, with order inflows down 38 per cent in the third quarter. However, these were still 49 per cent higher than those in the third quarter of 2010-11, at Rs 6,883 crore.
| BOUNCING BACK (Rs crore) | |||
| Sales FY11 | Order inflows Oct-Dec 2011 | Backlog till Sep 2011 | |
| Aban Offshore | 3,347 | 285 | 10,108 |
| ABB | 6,287 | 4,000 | 9,150 |
| BEML | 2,628 | 318 | 4,712 |
| BGR | 4,750 | 1,698 | 7,270 |
| BHEL | 42,274 | 7,894 | 1,61,000 |
| Crompton Greaves | 10,111 | Nil | 7,000 |
| IVRCL | 6,838 | 3,392 | 26,000 |
| KEC International | 4,474 | 547 | 8,500 |
| Larsen & Toubro | 51,820 | 8,357 | 1,42,200 |
| Punj Lloyds | 7,850 | 2,540 | 27,700 |
| Compiled by BS Research Bureau | |||
Orders are back for BHEL after nil flow in the previous quarter, while BGR Energy is also back among orders after four quarters of poor show.
According to the Indian Electrical and Electronics Manufacturers’ Association (IEEMA), the domestic electrical equipment industry registered a moderate growth of 7.7 per cent in the first half of 2011-12.
In the second quarter, growth decelerated to just 3.6 per cent from 13.82 per cent in the first. The latest growth figures till November indicate a further growth shrinkage, to about 5 per cent. Broadly, the situation seems to be improving when compared to the first quarter.
IEEMA President Ramesh Chandak, who is also the managing director & CEO of KEC International, explained that imports were one of the main reasons for slowing orders to Indian players.
He said: “The current export-import trends, based on trade data from select major ports, indicate an alarming growth, of more than 100 per cent, in imports of products like power transformers, reactors & EHV insulators (mostly in 765-kv segment), and HV switchgears mainly from China, S Korea, Germany and East European countries.”
Most of these equipment are imported from China, as that country gives over 20 per cent of indirect subsidy on account of managed currency (the rupee has lost 20 per cent against the dollar while the Chinese currency is pegged with dollar and hence has strengthened a bit) and a direct subsidy of 10-12 per cent. On the other hand, domestic power equipment makers have to pay taxes of 11-12 per cent, leading to a gap of 45 per cent.
The currency factor and China’s subsidy issue are structural and not sentimental and, hence, will have a medium-term impact, Chandak explains, adding that the long-term prospects are intact. “In the medium term, industry is witnessing a decline in enquiries and order finalisations. It has reported a wait-and-watch stand adopted by purchasing bodies, including in core sectors like cement, steel, etc, due to uncertainty in the economic, financial and political situation of the country.”
Edelweiss Research Analyst Amit Mahawar says: “Given the policy changes in the recent past, there will be lumpiness in order book. Among the sectors where we expect improvement in orders are roads and power transmission and distribution (T&D), while there would be pressure on the BTG (Boiler-Turbine Generators) space.”
Decline in order inflows in BTG is primarily driven by pipeline, coal and land issues.
Will improvement seen in the December quarter remain a quarterly phenomenon? Given the current status on overall infrastructure sector, it may be looking so but there is optimism on the horizon.
Centre for Monitoring Indian Economy (CMIE) Managing Director & CEO Mahesh Vyas says: “The slowdown in orders in the recent past appears to be a short-term blip caused by supply bottleneck in key raw materials like gas, iron ore and coal.” These issues would get sorted out in the next couple of quarters and there may be recovery thereafter, he adds.
Power companies have put new projects on hold due to supply bottleneck. The coal situation is improving, while the government has raised iron ore export duty to make more ore available for steel companies domestically.
Nischal Maheshwari of Edelweiss Research says fiscal consolidation & de-bottlenecking of coal production can help kickstart the investment cycle, but fiscal consolidation is a must for private capex cycle to pick up, especially since external flows are unlikely to be strong. Rate cuts alone would not be adequate to engineer a turnaround, he says. The current macro decline is fashioned on the lines of the 1992 slowdown, even as the economy is now better placed on vulnerability indicators, he adds.
The weak investment cycle in the last five consecutive quarters due to rising inflation and interest rates has impacted the inflow of new orders to engineering and capital goods companies. According to IDFC Research, the rise in commodity prices and the increase in utilisation levels of user industries will be one of the major indicators of a pick-up in the cycle, as cement, steel and oil, are the key drivers of industrial capital expenditure.