Capital goods: Mixed bag

Growth in order inflow could well disappoint in a seasonally weak quarter.

Don’t expect any fireworks from the capital goods sector just yet. While the long-term triggers are in place, growth in order inflow could very well disappoint. Credit Suisse expects the sector in aggregate to report 20 per cent growth in sales, which will mostly be base-effect driven, with flattish year-on-year margins. Given that the order inflows from the power sector have not been very encouraging, analysts are expecting a 20 per cent growth in order inflows for the sector.

On the industrial front, short cycle order inflows could be strong in the first quarter. Industrial project activity and large infrastructure order flows still remain weak. Consequently, companies such as BHEL, BGR Energy, ABB, Voltas and Areva T&D could disappoint, believe analysts. As the first quarter is considered a seasonally weak quarter for order inflows, it is likely that poor order flows may not have an immediate impact on stock prices. What will impact the sector, however, are the deteriorating fundamentals of the power sector.

Analysts believe this would impact the thermal power segment in two ways, as not too many orders would be finalised given the lower participation of private sector. While order inflows is one concern, the industry landscape for Indian power equipment manufacturing is changing rapidly with the participation of Chinese and Korean companies and rising domestic capacity (from 15Gw to 40Gw in the next three years). Rising competition is not only hurting market share of players like BHEL, but is also impacting margins.

What to watch out for? On the earnings front, accounting changes could benefit some companies and this could also create huge disparity with expected numbers, more so because the impact of accounting changes made last year by BHEL, Suzlon (method of consolidating Repower) will not be separately quantified.

Cummins may include profit on the sale of the exhaust business this quarter Broadly, analysts expect BHEL, Siemens (base-effect led), KEC and Havells to report strong numbers. Crompton Greaves, Thermax, Cummins, BEML and Suzlon could also report in-line numbers, whereas ABB, Areva T&D, Punj Lloyd, BGR Energy and Voltas are expected to report a weak quarter.