No upturn in capex cycle as order books stay small
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 R940 crore. A weak global economy has hurt export and import volumes at the firm, which contracted for the second straight quarter, down 6% y-o-y in the three months to December. Volumes in the home market dipped 5% y-o-y and could be under pressure due to the increase in railway freight.
Overall, it’s been a desultory December quarter for India Inc so far with companies not able to drum up revenues.
Net sales for a clutch of 749 companies (excluding banks and financials) has risen just 12.5% y-o-y, the slowest in several quarters. The weak top line should have stunted profits but softer commodity prices have helped and with expenditure under control — up just 10.8% y-o-y — operating profit margins have expanded 125 basis points y-o-y, driving up operating profits by 22%. A big jump in other income of 25% y-o-y has helped push up net profits for the sample by 33.8% y-o-y.
How sluggish the economy is is reflected in the anaemic growth of the core sector index, which gained just 2.6% y-o-y in December, thanks to negative growth in coal, natural gas and fertilisers. The index, which has a weight of 37.9% in the IIP, has seen a growth between April and December of 3.3% y-o-y on a base of 4.8% in the corresponding period of 2011-12. India’s manufacturing PMI moderated to a three-month low of 53.2 in January from 54.7 in December with the fall resulting from both domestic and export new orders; the new orders to inventory ratio fell to 1.16 from 1.21, indicating some downside risk to the PMI in February.
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