The outlook for the capital goods industry is improving now that money is relatively cheap and easier to access. Also, with the economy gathering momentum ? the Index of Industrial Production (IIP) for November 2009 grew 11.7% year-on-year ? companies should gain the confidence to go ahead with their expansion plans.
For the quarter ended December 2009, revenues of capital goods firms are expected to grow in strong double-digits ? analysts estimate this could be in the region of around 16% year-on-year. Operating profits should also turn out to be impressive ? on an average, the earnings before interest, taxes, depreciation and amortisation (Ebitda) should increase by about 20%. To be sure, there is a low base effect ? after all, December 2008 was a difficult period for Indian industry as a whole, given the global financial meltdown that also impacted the liquidity situation severely.
Since makers of capital goods had faced a tough time in the three months to December 2008, the numbers this time around would certainly appear more impressive. For one, they should have supplied more goods now that India Inc is buying more. Besides, engineering firms? expenses on interest would have come down, given that money is now cheaper.
Also, industry experts are anticipating more orders to be executed in the second half of 2009-10 compared to the first half. This would be especially true for the transmission and distribution (T&D) space. Indeed, profitability has been under some kind of pressure in the past two or three quarters, partly because orders were not being executed as fast as planned. The highly competitive T&D segment hurt Siemens? numbers in the September 2009 quarter when the business saw a drop in revenues, thanks to pricing pressures. That dragged down revenues for the company as a whole, which ended the quarter with an increase in the topline of just 4% year-on-year, at Rs 2,518 crore, though the industry division did fairly well, reporting a rise in revenues of 23%. However, with the ratio of raw material costs to sales deteriorating, profitability wasn?t too strong for either of the segments, though it was definitely weaker for the energy business.
As a result,Siemens saw a near 300 basis points contraction in the operating margin to 9.7%, with the net profit lower by 32.6% year-on-year at Rs 152 crore. Industry sources say, after margin pressure during the past two-three quarters, the profitability of most firms should improve. Capital goods maker ABB has seen its profitability fall for five consecutive quarters with the operating profit margin contracting by about 50 basis points in the three months to September 2009 to 8.4%. Revenues for the firm dipped 4.3% year-on-year to Rs 1,454 crore, with both power systems and process automation divisions facing some pressure on the margin front.
However, the December 2009 quarter should tell a somewhat different story for companies across the sector with some problems for those that may have had an exposure to irrigation projects in Andhra Pradesh, notes an
IDFC-SSKI report. Orders from the irrigation and water management segment have been tepid due to political developments on the demand to form a separate state of Telengana. But, in general, orders have been flowing in. The engineering sector?s biggest player Larson and Toubro (L&T) has, during the December 2009 quarter, bagged large orders like a Rs 6,900-crore BTG order from Mahagenco (1,980 mw) and a Rs 1,600-crore BOP order from MP Power (1,200 mw). At the end of September 2009, the company had an order book worth Rs 81,600 crore.
Bhel?s order book at the end of September 2009 was Rs 1,25,800 crore and during the December 2009 quarter, the public sector unit managed to win orders of around Rs 6,000 crore. Siemens?s order book at the end of September 2009 was Rs10,300 crore and it has won orders worth Rs1,000 crore in the three months to December. The Pune-based Thermax has been among the fastest companies to recover from the downturn; the firm has bagged several large orders and boasts of an orderbook of Rs 5,060 crore that includes a couple in the energy space.
Brokerage Motilal Oswal Securities, however, cautions that while orders are flowing in from both public and private utilities in the power space, other segments don?t seem to see as much activity. However, the lower cost of capital, easy credit availability, buoyant equity markets and increased consumption are expected to translate into a faster build-up in capacity over the next six to nine months for most sectors.