No upturn in capex cycle as order books stay small

Feb 04 2013, 00:43 IST
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weak signals weak signals
SummaryDisappointing numbers from industry heavyweights Bharat Heavy Electricals and JSW Steel and lacklustre results from core sector players like Grasim, Sesa Goa, Crompton Greaves, Adani Power and Container Corporation suggest the economy may be far from bottoming out.

Disappointing numbers from industry heavyweights Bharat Heavy Electricals (BHEL) and JSW Steel and lacklustre results from core sector players like Grasim, Sesa Goa, Crompton Greaves, Adani Power and Container Corporation suggest the economy may be far from bottoming out. Engineering firm BHEL reported a 17.5% fall in net profit on a yearly basis in the three months to December, Grasim’s bottom line dipped 18% year-on-year while both Adani Power and Crompton Greaves reported losses. Dwindling orders are hurting top lines — BHEL’s sales dipped 5% — while a difficult regulatory environment is taking a toll on miners like Sesa Goa.

Clearly, the demand for industrial goods isn’t picking up meaningfully — Larsen & Toubro’s muted 10% y-o-y top line growth suggests a loss in momentum given that the company’s revenues had risen 21% y-o-y in the first half of the year. Going by the order books at engineering firms, the capex cycle doesn’t seem to have turned yet; BHEL’s order backlog contracted sequentially to R1.1 lakh crore at the end of December, from R1.22 lakh crore at the end of September and R1.33 lakh crore at the end of June. In a recent note, JPMorgan highlighted that BHEL’s book/billings ratio had dropped to 2.4 times from 4.3 times two years back. Order inflows at Siemens fell 31% y-o-y, resulting in a further contraction in the backlog. The MNC reported flat sales with the net profit of R73 crore missing estimates by 50%. Order inflows at Crompton Greaves have grown just 3% in the nine months to December compared with a 16% growth in FY12. Demand for key commodities like cement remains weak; sales volumes at Ultratech were flat in the December quarter.

Analysts believe there could be more pain, pointing out that the slowing demand for steel and additional capacity in the steel industry has made the environment more challenging for manufacturers like JSW Steel. JSW Steel’s net sales rose just 5% y-o-y as realisations came off more sharply than anticipated, driving down the Ebitda/tonne to $112 from $129 a year ago. The continuing ban on iron ore mining in both Goa and Karnataka hurt Sesa Goa’s operations — the company produced no ore during the quarter, resulting in an Ebitda loss of Rs 100 crore.

With business dull, companies are in no hurry to expand; Container Corporation has lowered its capex target for the current year from R1,640 crore to

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