Investors see green shoots in capital goods sector

Sectoral index up 10% in past month, as market takes hope from higher order book, revenue and operating margins in September quarter

Stock investors are betting highly on recovery in the capital goods sector, noting the top 10 companies in the sector have shown good results in all the three key parameters of order book growth, revenue growth and operating margins in the September quarter.

The stocks of most capital goods firms have seen a rebound. The big ones such as Larsen & Toubro (L&T) and Crompton Greaves have surged 14 per cent and 11 per cent, respectively (see chart) in the past month. The others are not far behind. Since mid-October, the BSE Capital goods index was up 10.15 per cent.

Analysts say when compared to preceding quarters, the green shoots are visible in the margins and in revenue growth, as the government is taking steps to re-start stalled projects, invites bids for new airports and plans a bailout package for ailing road projects.

Citing an example, analysts say from the recent lows in March this year, Crompton’s standalone margins recovered by 210 basis points to nine per cent, aided by higher exports and the rupee depreciation  in September.

The biggest surprise for the investors came from the big boy of the industry, L&T, which reported a growth of 27 per cent in order book at Rs 26,533 crore during the quarter. The book grew mainly due to the company’s focus on international markets, as orders from India had dried up in recent quarters.

L&T’s revenue also grew by 10 per cent to Rs 14,509 crore, taking analysts by surprise.

L&T officials say the domestic market continues to be challenging and the investment climate continues to hamper the order book growth, especially in the power and metal sectors. However, company officials say the rest of the year will be good in terms of revenue growth.

“The revenue growth is in line with our plans, as revenues have improved compared to the first quarter. These (revenues) would gather momentum in the next two quarters, to fulfil our guidance of 15 per cent revenue growth through the year,” said Chief Financial Officer Shankar Raman, while announcing the company results last month. “The domestic market is still challenging, with depressed conditions in the power and metals sector. The government is trying to improve the sentiment but for this to translate into orders for a company like ours is still a few quarters away,” said Raman.

ABB India also surprised investors when it reported a healthy 71 per cent growth in its third quarter net profit to Rs 36 crore for the quarter ended September, as compared to the corresponding previous quarter, riding primarily on heightened efficiencies and increased localisation. ABB India’s MD, Bazmi Husain, said savings from these initiatives helped balance the adverse impact of continuing price erosion and a weak market condition.

The one biggie not showing a good turnaround is government-owned Bharat Heavy Electricals Ltd. The company was one of the worst performers during the sector in the September quarter but it is expecting the rest of the financial year to be better. The management is expecting revenue to gather steam with the pick-up in a few slow-moving projects. The company says of the total order tenders of 15 Gw to be awarded, five Gw were in an advanced stage.  It is also expecting some stalled power projects to start and help it bag new orders.