The robust IIP numbers at 13.8% for July reflected a 63% year-on-year growth in the capital goods sector during the month, indicating a pick-up in demand for industrial goods across sectors. A revival in industrial capex is also evident from order intake for engineering companies, which was up 14% in Q1FY11.
Revenue growth in the first quarter of FY11 was 13% y-o-y for the engineering sector. For the second quarter ended September 30, 2010, analysts expect revenue growth of 14%-20% y-o-y, given a pick up in execution in the power and infrastructure segments.
Dhirendra Tiwari, an analyst with Motilal Oswal in his report, said, ?Growth is being driven largely by Bhel, Crompton and Thermax. We expect them to post Q2 FY11 revenue growth of 17%, 14% and 35% y-o-y respectively.?
EBITDA margins during the quarter are expected to be stable, with margin improvement expected for Siemens (up 412 basis points y-o-y) and ABB’s expected margins to slide (down 291 basis points y-o-y).
?Prices of steel and copper increased by more than 50% from their Q1 FY10 levels. Incremental project bids and fixed-price contracts in the existing backlog (35-40% of L&T and Bhel?s order backlog) will have an impact on margins with a 3-6 month lag,? Tiwari said.
According to IIFL report, order inflows for the sector should pick up in the second half FY11, helped by power transmission orders and a pick-up in industrial capex. IIFL sees accelerated growth at Crompton Greaves as international subsidiaries are witnessing an uptick and the adverse currency impact starts waning from Q3 FY11 onwards.
?Bhel should report revenue growth of 23% for Q2 FY11, helped by the large order book and steady execution,? the report stated. Further, during the quarter, companies are likely to report lower interest costs and higher other income led by focus on working capital management and generation of free cash flows, believes IDFC Securities.