Investors on Monday were shocked by a 25.5% yoy contraction in capital goods in October which dragged down factory output to a negative 5.5%. Increasing worries of a slowdown took toll on capital goods and power companies as stocks plunged between 2-7%, second significant drop in less than three days. BGR Energy and Punj Lloyd were two of the biggest losers, having lost 7% and 5% in Monday’s session while Crompton Greaves and Suzlon Energy lost about 3% each. For the year so far, the BSE CG and the BSE Power indices have emerged as two of the worst performing gauges, losing 40% and 37%, respectively while the market has lost about 22%.
Investors didn’t spare even heavyweights like Larsen & Toubro and BHEL which saw a fall of 2.62% and 2.48%, respectively. In the year so far, both stocks have given up 40% and 45%, respectively, owing to a slow-down in order inflows. Also, the cost environment remains stressful given high input costs and interest rates. In the quarter ending September 2011, order inflows for both these large caps saw decline of by 21% yoy and 31% yoy, respectively.
On Monday, the BSE Capital Goods Index was dented by 2.4% while the BSE Power index tripped by 2.6%. The capital goods component of the output number showed a dramatic contraction of 25.5% even as all other use based components including consumer durables witnessed a shrinkage in the month.
According to Motilal Oswal Securities, order inflow of the tracked companies declined by 11% yoy in the September quarter and 16% for the first half of FY12. The brokerage house has cut down its aggregate order intake growth for the fiscal to 15% from 5% earlier, led by L&T and BHEL. In the power sector, coal linkages have posed problems along with a sharp jump in the price of imported coal. The negative impact is also passed on power equipment makers where demand slow down has been accentuated by the lack of coal linkages. The higher interest rates and high leverage have put pressure on these companies abilities to fund the sustained rise in cost overruns.
The deteriorating business environment has been continuously reflected in these companies financial performance in last one year. Between April and September, most of the companies reported a flat to negative growth in their net earnings for the quarter compared to last year. Companies like Crompton Greaves and Siemens, which saw their net profit dropping by more than 30%, many companies including Tata Power, Suzlon Energy, Lanco Infra and GMR Infrastructure and JSW Energy reported losses during the quarter.
In a report on infrastructure sector, BofAML has pointed out that high leverage of infra companies increased the risk to developers’ capex plans. The report points out that leveraged and asset heavy developers with negative surprises in business have emerged as the worst performers. ?Leverage across the board is rising ? while that may not be so bad if it is regulated debt, combined with the closure of new equity window, we view it as problematic,? says the report.
