If the country?s economy grew at sub-7% in the three months to September 2011, much of it had to do with the fact that companies are not making the kind of capital expenditure they were expected to. The gross fixed capital formation contracted to 0.6% in the September 2011 quarter, the first time since 2008-09.
This contraction is seen as a reflection of the fundamental issues faced by capital-intensive industries, including power and infrastructure. Not surprisingly, most of the stocks from these sectors have lost anywhere between 30% to 80% of their market value in the year so far. That is reflected in the performance of both the BSE capital goods index and the BSE Power index, which have turned out to be two of the worst performing indices so far in 2011, having yielded lost around 35-33% over the last eleven months. GVR Power, for instance, has plunged 72% while Punj Lloyd and Crompton Greaves have given up 55%. BHEL and Larsen and Toubro have lost around 35%.
In the power sector, coal linkages have posed problems as has the sharp jump in the price of imported coal. It?s not surprising then that stocks in the infrastructure space, including engineering and power companies, have been consistently underperforming the market throughout 2011. A combination of higher input costs, increasing interest rates and a slowdown in order books on the back of lagging government project spending have put severe pressure on the margins of these companies for the last five quarters.
Given that orderbooks aren?t growing fast enough, the underperformance may continue. Companies have been reluctant to put out money over the last six months: that was already evident from the fall in Larsen and Toubro?s (L&T) orders of 21% y-o-y in the September quarter, which left the engineering major little choice but to tone down the order inflow guidance for this year to just 5% form the earlier 15%. At BHEL, order inflows are down 31% y-o-y between April and September, again not the most encouraging sign. Smaller firms like Voltas saw a 28% y-o-y drop in the September quarter,
The cost overruns for projects like GVK Power?s 330-mw Alaknanda plant where it?s up 44% to R3,900 crore and the Mumbai airport capex which has risen 25% to R12,300 crore is not good news at a time when interest rates remain high. What?s even more worrying is that many of these companies are now highly leveraged at a time when interest rates are also high.
The high borrowings together with the slowdown in business activity has weighed on the performance of these stocks as noted by Bank of America Merrill Lynch (BofAML). The report points out that leveraged and asset heavy developers with negative surprises in business have emerged as the worst performers. The net debt/equity ratio, an indicator of financial leverage, at higher than 3 times for the sample studied, could put further pressure on companies? capex plans, BofAML believes. It says Indian infrastrucutre companies could face headwinds of high inflation, high interest rates, global macro turmoil, domestic policy paralysis and low business confidence which could impact their profits in 2012-13.
