Aggregate revenue of 74 industrial companies grew 2% y-o-y – a positive print after two quarters of decline. Broad-based growth still remains elusive, with aggregate revenue growth remaining stuck at 2- 6% for the previous 8-9 quarters. While engineering companies reported revenue growth, contractors’ revenue continued to decline y-o-y. There was wide dispersion among companies’ performance, which was symptomatic of the vagaries of project lifecycles when order books are supported by a few chunky orders. Improving traction for industrial consumables was a positive. This subset reported double-digit revenue growth for the first time in the last 20 quarters. If the momentum accelerates, it would be an indicator of the onset of an industrial capex cycle. The government’s continued thrust on railways and highways has made companies hopeful about sustained order momentum. Industrial companies remain impacted by a lack of broad-based industrial investment intentions, although select segments have had an order uptick. Net-net, the hopes of management remain pinned on public investments, although some companies pointed to continued execution bottlenecks in ongoing infrastructure projects.
Aggregate domestic order inflow for Indian E&C companies has remained flat y-o-y in FY17. Railways, power T&D and water were the bright spots in FY17. The strong performers of FY16 had a subdued FY17 – thermal power orders declined 40% y-o-y and NHAI orders were flat y-o-y. Real estate ordering remained muted and there was further loss of momentum following demonetization. The public sector contributes only a fourth of overall investment in India, making it difficult for public capex to drive the cycle alone. Also, public projects are prone to delays at every stage of the lifecycle, given the design of public procurement processes. The government’s stance on fiscal consolidation means public investments could face fund constraints as well.
After 12% out performance to the broader markets over the last 12 months, our industrials coverage universe is trading at above-cyclical average multiples. Consensus FY18/19 earnings estimates are 4% or 6% above ours, reflecting expectations of a near-term pick-up in the investment cycle.
We do not expect private capex to pick up before FY19. As we had anticipated, the pick-up in public capex is falling short of initial expectations. As a result, the overall investment cycle could remain weak.