In what can be a sign of optimism in India’s economic landscape, infrastructure and capital goods firms have been recording a rise in order book positions, with some firms reaching their highest-ever figures.
For instance, Larsen & Toubro’s order book on a group basis was Rs 3.63 trillion as of June 30, the highest-ever for the engineering and construction major company. The same was the case for engineering, procurement and construction (EPC) major KEC International’s order book position (including lowest bidder status) of Rs 30,000 crore.
“Order books of construction companies have been increasing for some time, they had risen in FY22 and the thrust continues in the current year too. Some of the industries, like roads, water, metros and railways, have been awarding contracts at a good pace. Consequently, construction companies are benefiting from the same,” Anand Kulkarni, director, at Crisil Ratings told FE.
“Currently the order books are largely driven by central government capex. Private sector capex pick-up is not broad-based. There are some sectors like steel, cement, textiles which are adding capacities, but with moderation in commodity prices, they are re-evaluating the timelines. Some of the new-age sectors such as data centres and warehousing are also generating demand,” he said.
Siemens’ new orders from continuing operations stood at Rs 4,992 crore in the June quarter, a 20% rise over the same period last year. Pune-based engineering conglomerate Thermax’s order booking for the quarter rose 36% to Rs 2,310 crore. EPC company Kalpataru Power Transmission also recorded a 13% rise in consolidated orderbook to Rs 36,880 crore on a quarter-on-quarter basis. In FY22, order booking of Tata Projects stood at Rs 14,800 crore (Rs 8,860 crore in the previous year), resulting in a total order backlog of Rs 44,997 crore.
“The domestic capex cycle, especially private sector capex, was crimped in the past by a couple of factors such as lower capacity utilisation, leveraged balance sheets and challenges related to getting clearances from multiple agencies. Hence, bulk of the heavy lifting was done by the government by stepping up public investment in core infrastructure space such as roads and railways, among others. However, this too got a bit constrained by the pandemic. But this scenario is fast changing and India could be on the cusp of a multi-year investment or capex cycle,” Milind Muchhala, executive director at wealth management firm Julius Baer India, told FE.
“While public sector capex is expected to pick up pace with improving revenue collection, private sector capex will gather steam with necessary ingredients in place. The overall capacity utilisation has been steadily improving to 75% and historically, when this figure has moved closer to 80%, which can happen in the next couple of quarters, it typically triggers the next round of investment cycle,” Muchhala said.
According to Abhishek Gupta, sector head and assistant vice president at Icra, an increase in project tendering in the infrastructure sector has helped firm up order inflows.
“This, in turn, is supported by the vision of increasing the infrastructure investment as planned under the National Infrastructure Pipeline, and corresponding higher budgetary allocation by central and many state governments towards infrastructure sectors. While government capex has increased and is expected to rise over the medium term, private sector capex is yet to pick up on a sustainable basis. Private sector capex is highly sensitive to the economic outlook and uncertainties, which have increased in the last few months with a high inflationary environment,” Gupta said.
Are companies biting more than they can chew? As far as the working capital cycle is in check, “it is manageable” is the consensus view.