Capital goods firms see light at the end of the tunnel

CEOs say stuck projects coming back to life, though fresh investments still a year away

Capital goods companies have been battling a severe downturn over the past couple of years, as orders thinned over projects stalled in an economic downturn and for lack of clearances. Payment cycles worsened as power distributors delayed payments and companies, in turn, squeezed their suppliers.

There is, however, light at the end of the tunnel. Along with improving business confidence, many grounded projects are coming back on track, though top executives with capital goods companies and industry analysts said the investment cycle would take 6-24 months to revive.

“From the fourth quarter onwards, we could see a revival in certain sectors such as food processing, pharmaceuticals, textiles, chemicals and light engineering. These sectors do not require policy correction by the government,” said M S Unnikrishnan, chief executive of Thermax.

TURNAROUND IN OFFING?

• The downturn is mainly because orders thinned over projects stalled in an economic downturn and for lack of clearances
• Payment cycles worsened as power distributors delayed payments and companies, in turn, squeezed their suppliers
• However, business confidence has improved lately
• Many grounded projects are coming back on track, though top executives with capital goods companies and industry analysts said the investment cycle would take 6-24 months to revive
• Softening prices of copper and aluminium are expected to boost profit margins

Sectors like power and steel are likely to lag because of unresolved issues, but oil, gas and railway projects could see a pick-up due to policy reforms. “I do not see much growth in the power sector for two years in light of the Supreme Court order cancelling coal blocks,” Unnikrishnan added.

Executives and analysts said payment problems would ease out as stalled projects started moving. This, in turn, would also lead to revenue growth. Unnikrishnan expected payment issues to sort out over the next two-three quarters.

Another positive development for the sector will be a decline in metal prices. Softening prices of copper and aluminium are expected to boost profit margins of some capital goods companies by lowering their input costs.

“Six of our transmission and distribution projects, in various stages of completion and stuck due to lack of environment clearances, have started moving as clearances have come through,” said Vimal Kejriwal, president, transmission and  distribution, of RPG-group company KEC International.

A Goldman Sachs report said sales for the capital goods sector fell in the first quarter of 2014-15 year on year but profit margins improved because of cost savings. The sales performance was better than the fourth quarter of 2013-14, which had seen a sharper eight per cent decline year on year. The report said much of the sales growth was due to overseas orders and the local market remained subdued. The companies’ order books grew two per cent in the first quarter, with Larsen & Toubro driving the growth.

Analysts said companies were dusting off capital expenditure  plans as business sentiment turned positive, but order inflows would be more in short-cycle industrial products as long-cycle projects depended on regulatory approvals.

“The business sentiment and investment outlook have significantly changed, but these are yet to translate into orders, at least for equipment makers in the power sector, which face heavy competition from overseas. Infrastructure and power producers are focused on completing projects,” said Kameswara Rao, energy and utilities head at PricewaterhouseCoopers.

Large infrastructure players, including the GMR group and the Jaypee group, are divesting assets to pare debt. Most gas-based power plants of the GMR group and the GVK group are shut due to a gas shortage. Last month, Lanco Infratech announced it would sell plants producing 3,000 Mw of electricity to reduce debt.

“We are in the development stage for various hydroelectric power projects. Fresh orders will be for construction of upcoming hydroelectric power projects. We are focused on taking forward projects in hand,” said a GMR Group spokesperson.

“The capital expenditure proposed in 2014-15 towards completion of projects is Rs 3,135 crore. The fund will be used for the Chhattisgarh project, the Bajoli Holi and Badrinath ( Alaknanda) hydroelectric projects and transmission,” the GMR spokesperson added.

“Companies will begin investing if entrepreneurship is rewarded. Banks will lend to projects when they know loans will not turn into NPAs (non-performing assets). The central government is taking steps to encourage growth. There are positive vibes,” said Nilesh Shah, chief executive of Axis Capital.

Michael Thiemann, chief executive officer of ThyssenKrupp India, hoped to see growth in infrastructure with Prime Minister Narendra Modi’s ‘Make In India’ vision. “We believe the increase in business prospects will raise global interest in local business and it will be a win-win situation for both the Indian economy and multinational conglomerates,” Thiemann said.