Sluggish pace of private sector investments will continue to impact the performance of capital goods sector, till at least the first six months of 2016-2017—as low commodity prices and high leverage levels prevent companies from committing fresh capex.
The recovery in investments is being witnessed in spurts—from power utilities segment, buildings and factories and construction segments. However, large industrial orders still remain illusive, which suggests that the overall recovery will still take a good six months or more.
According to a April 2016 report of Edelweiss Securities, though the pace of private sector investments has gained momentum, it is still 60% below the previous peak seen over FY08-09.
A good reason for private sector’s apathy towards committing more capital is due to the fact that a lot of it is still stuck in stalled projects. According to the latest data released by Centre for Monitoring Indian Economy (CMIE), the percentage share of stalled projects in total projects has risen to 12.3% for the quarter ending March 2016, which is the highest since the BJP-led government assumed office.
Unless a sizeable proportion of this capital is released, new private sector investments will be hard to come by. R Shankar Raman, chief financial officer, Larsen and Toubro says that the private sector will tread cautiously when it comes to deploying new capital. “Only those balance sheets that can afford investment and financial closure will look at this environment little more positively,” he said.
It is for a reason that most capital goods majors—L&T, BHEL, Siemens, ABB, Thermax, and others are forced to rely on orders trickling down from sectors like real estate, IT, automobile, health care, leisure, food processing, consumer durables and textiles. However, these sort of orders are not enough to boost the growth in capital goods space, say industry players.
M S Unnikrishnan, managing director and CEO, Thermax confirms that the absence of traction in larger orders is being bitterly felt from core industries like power, steel, fertilizers and oil & gas. “The activity remains stagnant. There is no capacity addition for these sectors since many companies are operating at a capacity utilisation of 60-70%,” he observed.
In fact, BHEL’s poor performance in the three months of January-March 2016 further cements the path to a long drawn recovery.
The state-run company posted a provisional net loss of R880 crore for the full year ended March 31, 2016, against a net profit of R1,430 crore last year. The provisional FY16 sales came in at R26,700 crore, a decline of 12% y-o-y. The company also missed street expectations on its order inflows, which came in at R43,730 crore.