FE Editorial : False dawn

Written by The Financial Express | Updated: Nov 9 2012, 06:43am hrs
On the face of it, it would appear that the corporate sector has put up a reasonably good show in the three months to September 2012. Despite the top line not growing as fast as it has in recent quarters, profits have been decent because companies have managed to protect their margins by keeping costs in check. However, the big picture hides the grim reality that capital expenditure is slowing; results for a sample of 1,200 companies show that depreciation in the September quarter has risen at the slowest pace in the last couple of years, apart from remaining virtually flat in the last three quarters. Those keeping track of investments say that while no management is really rushing to add fresh capacity in a difficult economic environment, key sectors like cement, hydrocarbons and metallurgy in particular are seeing very little fresh money coming in. Going by the performance of BHEL whose profits fell 10% y-o-y on flat revenues, and whose order book was smaller at the end of September than it was in June, it would seem that even the power sector is no longer humming with activity. Delays in executionthe result of companies dragging their feetare dogging capital goods firms as much as the slowdown in capex activity. Orders at Thermax fell 5% y-o-y in the September quarter, while ABB didnt just miss earnings estimates by a mile but also saw its orders plunge 33% y-o-y, with big wins eluding it altogether. Management commentary is more than circumspect, with companies pointing out that even if large orders do come their way, they are way less profitable these days than they were a couple of years back, given that half a dozen players are slugging it out for a handful of orders.

The bad news is that it could get tougher for these firms. Thats because the pace at which banks are sanctioning project finance is dropping off fast; financial closures completed by banks in the June 2012 quarter amounted to R26,800 crore, showing virtually no increase over the March 2012 quarter. Moreover, the total amount sanctioned in those six months would translate into an annualised sum of about R1 lakh crore, which is less than a fourth of the peak of R4.5 lakh crore achieved in FY2010. So, if industry is going to be spending less on new ventures, orders for engineering firms are going to become scarcer. Of course, these numbers relate only to private sector projects with an outlay of over R10 crore and funded by a financial institution, but they are nonetheless representative since few projects are funded entirely out of a companys cash flows. Unless investments pick up, the economy cant get back on track, which is why, although the order-book at L&T may have jumped 30% y-o-y in the September quarter, analysts remain cautious about the prospects of engineering firms. The capital goods sector de-grew 1.7% y-o-y in August, with the only encouraging sign being that the three-month moving average was lower at minus 11.5% compared with minus 20% levels in the past. But thats not good enough.