Dry spell on for capital goods

The historic 25.5 per cent fall in the capital goods sector has not come as a surprise for an industry that is faced with a bigger worry of thinning order books. Experts say that the fall in October production figures is a clear indication of slowing annual growth in the sector.

Worried industry captains want swift government action. “The capital goods industry in India will face severe problems unless government takes some active policy decisions,” says A M Naik, chairman of infrastructure major Larsen and Toubro. “It has to create a level playing field vis-a-vis Chinese imports, especially in the power sector.”

 

The power sector, which is the driving factor for orderbook growth, has been slow in giving out orders. With road projects stuck in land acquisition issues, and no major movement from general industry as well, the last seven months have been seen no major orders. Analysts say rising interest rates is not the only factor for the fall.

“There is a policy paralysis, especially on the fuel side for power projects,” notes Shailesh Kanani, senior research analyst at Angel Broking.

“Many projects are delayed because of uncertainty in coal. Until these factors are taken care of, the capital goods sector will remain subdued.”

The huge orders accumulated in the past will help big capital goods manufacturers clock in good revenues for the current year. But if this revenue growth has to be sustained, orders will have to come in now.

“If order inflow does not pick up in the next six months, there will be a fall in sales as well in the next few years,” points out Nidhi Agarwal, capital goods analyst at Sharekhan. “Margins have been down, but capital goods companies, like L&T and BHEL, have registered double digit growth this year. But if orders are slow now, we will see the impact in 2012-13 and 2014-14.”

M S Unnikrishnan, chief executive officer of Thermax, too agrees the years might be tough. He does not foresee any improvement in order inflow in the next six months.

“The second half of the current financial year might see further fall in results for the entire capital goods industry,” adds Unnikrishnan.

On Monday, stock exchanges took cues from the production numbers as the capital goods index dived by 2.5 per cent. Areva T&D saw one of the biggest falls, as the stock went down by 5.3 per cent. L&T and BHEL fell by 2.6 per cent and 2.6 per cent, respectively. Siemens India’s stock was down by 1.3 per cent.