Strong Q1 likely for capital goods firms with low costs, healthy execution

Capital goods companies are likely to report double-digit growth in sales and profit for the first quarter of the 2023-24 financial year (Q1FY24), according to analysts. The performance will ride on lower raw-material costs and healthy execution of orders.

Sales by capital goods companies are likely to increase 13-20 per cent year-on-year (YoY), five domestic brokerage firms said. YoY growth in profit after tax (PAT) at such companies is expected to be between 21 per cent and 37 per cent, three domestic brokerages said.

The Street will watch out for guidance on new order inquiries, order execution and working capital management in the companies' post-earnings commentary. Raw material cost pressure has eased, and it is expected to boost profitability. Revenue growth will be aided by a healthy order book execution seen in the quarter ended June 2023, said analysts.

Analysts with Nirmal Bang said they expected an 80 basis points improvement in margins YoY, on the back of easing raw material costs, lower freight costs and better supply chain dynamics.

“Margin pressures are largely behind us as commodity inflation has cooled off significantly, and the unrecovered portion has been passed on in the form of price hikes,” said analysts with YES Securities in a July 6 report on the capital goods sector. Analysts with Prabhudas Lilladher expect the order execution momentum to have continued in the June quarter. “We expect our capital goods coverage universe to report healthy performance in Q1FY24, owing to strong opening order books, continued execution momentum, favourable product mix, and better demand/orders/volumes from domestic as well as key export markets such as Middle East (ME), Americas, SAARC, Africa,” they wrote in a July 6 report.

YES Securities analysts said management commentary on order inflows in domestic and international markets and its conversion would be key monitorable from companies like Siemens.

In May, engineering major Larsen & Toubro (L&T) gave guidance that predicted 10-12 per cent growth in order inflow and 12-15 per cent growth in revenue for full FY24. The Street will look out for the momentum of this guidance.

L&T will announce its Q1 results on July 25. For companies, such as BHEL, the street will also watch out for further clarity on the non-power segment.