Dwindling funds, execution delays, poor order flows and further cuts in private capex may hit the capital goods industry and its performance in the short term.
The moderation in the index of industrial production (IIP) to 3% in the first 10 months (down from 8.6% in the corresponding period of the last fiscal) and a relatively flattish capital goods component of IIP, indicate the ongoing moderation, according to market sources. On the other hand, a healthy pick-up in the cement and steel offtake is a comfort of sorts in terms of enhanced government spending on infrastructure projects. Accordingly, the companies with higher exposure to government spending are better placed than others, sources said.
According to analysts, one of the major concerns that dragged the capital goods sector down has been the slowdown in private capital expenditure and the consequent stress on order inflows. While orders have been slowing, the current quarter saw poor flows, especially for medium and small-sized companies. On the other hand, the heavyweights continued to report strong order inflows. For the companies in the power transmission & distribution (T&D) space, orders are seen to be picking up.
The profits of companies under this sector may grow at 8.3%, as lower operating margins and high interest costs (due to an elongated working capital cycle) will limit the profit growth (in spite of a healthy top line growth) of the companies, analysts added.
For the January-March quarter, it has been estimated that the capital goods companies will report a 25.3% revenue growth on the back of strong executions, particularly by larger players. However, for the medium and small-sized players, the growth is expected to moderate significantly, due to lower order flows and execution roadblocks.
While the prices of key raw materials have eased significantly during the past couple of quarters (with the base metal prices cooling off from their peaks), any positive impact on the earnings of companies may not happen immediately and are likely to start from the first quarter of FY2010.
The extent of benefits will also depend upon the nature of contracts (fixed and variable prices) and the inventory levels of the materials held by the company, analysts added.