Industry continues to struggle with sluggish revenue growth amid economic slowdown and drying up of orders and most firms may miss revenue guidance for this financial year
Indian engineering companies are having to make do with fewer orders and sluggish revenue growth for several quarters now. Larsen & Toubro, Thermax, ABB, Crompton Greaves and the like have not been able to lift performance thanks to failing health of clients, rising inflation, slow policy initiatives and a gloomy economy.
Only L&T and Thermax have announced their December quarter earnings so far.
The sluggishness will likely continue through the March quarter and top players will miss their revenue guidance as fresh orders dry up and ongoing projects move at a slower pace till the general elections.
L&T, the trendsetter for the capital goods firms, has already cut order inflow guidance for the financial year by 25 per cent and is doubtful about meeting its revenue guidance. Thermax failed to meet Street expectations in the December quarter thanks to lower operating margins. It gave a weak forecast for the coming quarter.
The Thermax management believes fewer large orders are in the pipeline and it is taking longer than usual for orders to be finalised. Fresh awards in power, hydrocarbons, steel and cement sectors will likely remain weak over the next few quarters, it said.
Brokerage Ambit Capital said infrastructure sector contracts had long payment cycles and offered lower advances, leading to higher working capital requirement for L&T, even though the segment showed higher operating margins.
“Further deterioration in working capital could lead to lower operating cash flow. Declining customer advances and rising vendor support have been the main reasons of deterioration in working capital,” the brokerage said.
Brokerage Motilal Oswal believes sectoral headwinds remained strong through the December quarter, allowing only marginal revenue growth for capital goods companies during the December quarter. This, the brokerage said, resulted in 15 per cent year-on-year degrowth in operating margins and 23 per cent year-on-year decline in profit after tax.
Industry watchers await order inflow guidance from ABB and Siemens — firms that handle orders with shorter gestation periods — and volume guidance from Cummins.
The designer and manufacturer of power generation equipment, power systems, gasoline engines and custom power supplies hopes to benefit from a new pollution control norms for diesel generation sets up to 800 kw capacity that requires an improved technology.
The Cabinet Committee on Investments, a panel set up last February to speed up stalled projects, cleared 125 projects worth Rs 4 lakh crore till December 31, 2013, over 90 per cent of them being power projects and the rest from infrastructure, coal and oil and gas sectors. They all remain work in progress with minimal levels of execution.
A project monitoring group (PMG), set up to oversee fast-tracking of these projects, facilitated quick environmental clearance to Rs 20,280 crore worth of projects, and ensured fuel supply agreements for 15.4 gigawatt (GW) capacity power plants to be set up with an investment of Rs 94,400 crore.
Industry watchers say private companies whose projects have got cleared wait to see the outcome of the May general election before they go for execution. It’s important for the industry that the election throws up a stable government, they say. This means these firms will likely miss the Street estimates on revenue growth in the fourth quarter as well.
Firms in the boiler turbine and generator (BTG) space have big orders waiting in 12 to 15 months as 90 giga watt of power capacity goes for execution. Private sector firms will execute 60 per cent of these.
Broking house Motilal Oswal says an improvement in plant load factor (PLF) to 80 per cent for public sector power firms and 70 per cent for private firms would result in a 11.9 per cent compounded annual growth (CAGR) in coal-based power generation in five years. “L&T and Thermax would be major beneficiaries of the power sector capital expenditure when it begins, while BHEL is best positioned as cyclical factors support recovery,” the brokerage said in a third quarter preview of capital goods companies.
The ultra mega power projects or UMPPs, which have seen strong interest from top power firms, hold importance for capital goods firms despite the policy conundrum and economic slowdown. Firms like L&T that witnessed 14 per cent decline in power sector orders in the December quarter hope UMPPs would help them recover their losses.
Power Finance Corporation (PFC) plans to award two UMPPs in Odisha and Tamil Nadu — worth Rs 50,000 crore — in the first quarter of the next financial year. Bidding has begun and NTPC, Tata Power, NHPC, Adani Power, JSW Energy, Jindal Power, Sterlite Infraventures, CLP India and L&T are the nine firms qualified for the bidding. These pre-qualified bidders will submit their quotes shortly. Power sector analysts say these projects can help revive investment in the power industry, which has seen sluggish growth over the last couple of years.
Stock performance
Despite their recent fall, capital goods stocks have given good returns over the past three months. Welspun Corp, Sadbhav Engineering AIA Engineering, Lakshmi Machine and BHEL have gained between 20 per cent and 70 per cent during this period. Others such as IL&FS Transportation, Compton Greaves, Havells India, L&T and Thermax have risen 16.72 per cent, 16.51 per cent, 8.40 per cent, 6.16 per cent and 4 per cent, respectively.
Aditya Bhartia of Espirito Santo Securities is neutral on L&T. “While L&T is one of the best plays on the Indian capex cycle, we believe the investment momentum will stay weak in the domestic market over the next few quarters,” he argued. Bhartia has a ‘sell’ recommendation on Thermax too, as he finds the valuations rich. Most capital goods firms are yet to report December quarter earnings.
In the transmission and distribution space, Kunal Sheth of Prabhudas Lilladher said, “There is little to cheer about Power Grid order book for the first nine months of FY14.”
“We expect orders worth Rs 16,000 crore or thereabouts from Power Grid, reflecting flat YoY growth. Our interaction with the firm suggests pending orders worth Rs 26,000 crore to be tendered over the next two years. New approvals are likely to come over the next two years, which will drive growth,” he said.
Stocks such as ABB, Punj Lloyd, Alstom India and BEL are down as much as 8 per cent in the past three months.
Indian engineering companies are having to make do with fewer orders and sluggish revenue growth for several quarters now. Larsen & Toubro, Thermax, ABB, Crompton Greaves and the like have not been able to lift performance thanks to failing health of clients, rising inflation, slow policy initiatives and a gloomy economy.
Only L&T and Thermax have announced their December quarter earnings so far.
The sluggishness will likely continue through the March quarter and top players will miss their revenue guidance as fresh orders dry up and ongoing projects move at a slower pace till the general elections.
L&T, the trendsetter for the capital goods firms, has already cut order inflow guidance for the financial year by 25 per cent and is doubtful about meeting its revenue guidance. Thermax failed to meet Street expectations in the December quarter thanks to lower operating margins. It gave a weak forecast for the coming quarter.
The Thermax management believes fewer large orders are in the pipeline and it is taking longer than usual for orders to be finalised. Fresh awards in power, hydrocarbons, steel and cement sectors will likely remain weak over the next few quarters, it said.
Brokerage Ambit Capital said infrastructure sector contracts had long payment cycles and offered lower advances, leading to higher working capital requirement for L&T, even though the segment showed higher operating margins.
“Further deterioration in working capital could lead to lower operating cash flow. Declining customer advances and rising vendor support have been the main reasons of deterioration in working capital,” the brokerage said.
Brokerage Motilal Oswal believes sectoral headwinds remained strong through the December quarter, allowing only marginal revenue growth for capital goods companies during the December quarter. This, the brokerage said, resulted in 15 per cent year-on-year degrowth in operating margins and 23 per cent year-on-year decline in profit after tax.
Industry watchers await order inflow guidance from ABB and Siemens — firms that handle orders with shorter gestation periods — and volume guidance from Cummins.
The designer and manufacturer of power generation equipment, power systems, gasoline engines and custom power supplies hopes to benefit from a new pollution control norms for diesel generation sets up to 800 kw capacity that requires an improved technology.
The Cabinet Committee on Investments, a panel set up last February to speed up stalled projects, cleared 125 projects worth Rs 4 lakh crore till December 31, 2013, over 90 per cent of them being power projects and the rest from infrastructure, coal and oil and gas sectors. They all remain work in progress with minimal levels of execution.
A project monitoring group (PMG), set up to oversee fast-tracking of these projects, facilitated quick environmental clearance to Rs 20,280 crore worth of projects, and ensured fuel supply agreements for 15.4 gigawatt (GW) capacity power plants to be set up with an investment of Rs 94,400 crore.
Industry watchers say private companies whose projects have got cleared wait to see the outcome of the May general election before they go for execution. It’s important for the industry that the election throws up a stable government, they say. This means these firms will likely miss the Street estimates on revenue growth in the fourth quarter as well.
Firms in the boiler turbine and generator (BTG) space have big orders waiting in 12 to 15 months as 90 giga watt of power capacity goes for execution. Private sector firms will execute 60 per cent of these.
Broking house Motilal Oswal says an improvement in plant load factor (PLF) to 80 per cent for public sector power firms and 70 per cent for private firms would result in a 11.9 per cent compounded annual growth (CAGR) in coal-based power generation in five years. “L&T and Thermax would be major beneficiaries of the power sector capital expenditure when it begins, while BHEL is best positioned as cyclical factors support recovery,” the brokerage said in a third quarter preview of capital goods companies.
The ultra mega power projects or UMPPs, which have seen strong interest from top power firms, hold importance for capital goods firms despite the policy conundrum and economic slowdown. Firms like L&T that witnessed 14 per cent decline in power sector orders in the December quarter hope UMPPs would help them recover their losses.
Power Finance Corporation (PFC) plans to award two UMPPs in Odisha and Tamil Nadu — worth Rs 50,000 crore — in the first quarter of the next financial year. Bidding has begun and NTPC, Tata Power, NHPC, Adani Power, JSW Energy, Jindal Power, Sterlite Infraventures, CLP India and L&T are the nine firms qualified for the bidding. These pre-qualified bidders will submit their quotes shortly. Power sector analysts say these projects can help revive investment in the power industry, which has seen sluggish growth over the last couple of years.
Stock performance
Despite their recent fall, capital goods stocks have given good returns over the past three months. Welspun Corp, Sadbhav Engineering AIA Engineering, Lakshmi Machine and BHEL have gained between 20 per cent and 70 per cent during this period. Others such as IL&FS Transportation, Compton Greaves, Havells India, L&T and Thermax have risen 16.72 per cent, 16.51 per cent, 8.40 per cent, 6.16 per cent and 4 per cent, respectively.
Aditya Bhartia of Espirito Santo Securities is neutral on L&T. “While L&T is one of the best plays on the Indian capex cycle, we believe the investment momentum will stay weak in the domestic market over the next few quarters,” he argued. Bhartia has a ‘sell’ recommendation on Thermax too, as he finds the valuations rich. Most capital goods firms are yet to report December quarter earnings.
In the transmission and distribution space, Kunal Sheth of Prabhudas Lilladher said, “There is little to cheer about Power Grid order book for the first nine months of FY14.”
“We expect orders worth Rs 16,000 crore or thereabouts from Power Grid, reflecting flat YoY growth. Our interaction with the firm suggests pending orders worth Rs 26,000 crore to be tendered over the next two years. New approvals are likely to come over the next two years, which will drive growth,” he said.
Stocks such as ABB, Punj Lloyd, Alstom India and BEL are down as much as 8 per cent in the past three months.
