Domestic capital goods companies likely to report flat margins in Q4

Volumes expected to rise as demand picks up in select sectors, say experts

Domestic capital goods industry is gearing up for strong performance in 2021-22 (FY22), with margins for the March quarter expected to be flat year-on-year (YoY).
 
“The revenue volumes are looking up in the March quarter and may be up 8-9 per cent YoY. But with raw material prices going up for steel and other base metals, margins are seen flat for the quarter,” said Vimal Kejriwal, managing director and chief executive officer of KEC International.
 
The company’s order intake in the March quarter so far has been Rs 9,600 crore. Another Rs 6,000 crore are orders where the company has emerged the lowest bidder, but is yet to get a formal award of contract. It aims to end 2020-21 (FY21) with an order intake of Rs 16,000 crore, against Rs 12,000 crore in 2019-20.
 
“Demand from transmission and distribution, international (business), and green energy corridor in the domestic market has picked up well. Oil and gas, water pipeline, chemicals, and Metro projects are a few segments showing healthy recovery,” said Kejriwal.
 
Larsen & Toubro (L&T), on the other hand, could see an order inflow growth at 15 per cent YoY in the fourth quarter (Q4), implying the company will be able to retain 3-per cent order inflow growth for the full year (FY21).
 
“We see potential for mid-teens order inflow growth in Q4, ensuring the overall inflows for FY21 witness growth, against a broader expectation of a sharp decline a few quarters back,” said Bernstein in its report.

 
Order wins for L&T in Q4 were primarily led by domestic orders (78 per cent of the overall order mix), although a mix of international orders has returned to its normal run-rate of 25 per cent, said the Bernstein report.
 
Domestic orders were largely led by segments like railways (Metro and electrification) and power generation, it said.
 
Meanwhile, there were some sectors which did not pick up, belying expectations.
 
“Due to the Covid-19 pandemic, there were expectations of the warehousing and pharmaceutical segments picking up, but these sectors have not picked up. There is no widespread growth in these sectors, which was strongly against industry expectations,” said Kejriwal.
 
Going ahead, the companies remain bullish on order flow, coupled with strong earnings. “The government is focused on infrastructure spend because it recognises the fact that the driver for the economy will be infrastructure. Based on the announcements and initiatives, we believe there is a concrete plan and a concerted effort towards infrastructure spending. We shall be closely monitoring the implementation of the various initiatives announced in the Budget and shall actively engage in bidding for tenders to be announced under the National Infrastructure Pipeline,” said Sunil Mathur, managing director and chief executive officer of Siemens.
 
For the first quarter of 2020-21 ended December 31, 2020 — Siemens follows an October-September financial year cycle — the company registered revenue from the continuing operations at Rs 2,858 crore, a 15.9-per cent increase over the same quarter in the preceding year.
 
In the period under review, the company’s profit before tax from continuing operations of Rs 353 crore was 12.4 per cent of the revenue.
 
Expansionary FY22 budget, a $1.5-trillion National Infrastructure Pipeline with 50 per cent visibility, step-up in road ordering, new Metro/high-speed rail projects kicking off, and tentative revival in select private capital expenditure, or capex (i.e., metals/energy), signal India’s capex cycle is finally moving, said the JPMorgan report.
 
“We estimate a 10-per cent FY21-23 order book compound annual growth rate for L&T. Cancellation risks are lower than before, with focus on order quality and funding. We estimate 21 per cent and 14 per cent consolidated revenue growth in FY22 and FY23, respectively. We assume 9.1 per cent/9.3 per cent core margin, with commodities spike offsetting productivity loss/Covid-cost reversals and 12 per cent/12.3 per cent Ebitda margin,” said the JPMorgan report.