Q2 results: L&T gives weak guidance; HCC slips into red; Crompton cracks further.
State Bank of India Chairman Pratip Chaudhuri’s ominous warning that capital goods companies have started feeling the heat of a slowdown has already started showing. High interest rates, political uncertainties, currency fluctuations and a slowing down of new order flows are affecting the numbers of even the sectoral bellwethers.
So, if Hindustan Construction Company (HCC) slipped into a loss and Crompton Greaves (CG) cracked further in their second quarter numbers, Larsen & Toubro (L&T), too, felt the heat and revised their guidance on new order inflows.
The macro environment affects capital goods and construction companies the most because steel, power and other big manufacturing industries slow down their capital expenditure plans and, therefore, cut back on giving big orders to engineering and construction companies to build these plants and machinery. So, when the going is good, capital goods players ride piggyback on the overall boom.
But Friday’s reality of high interest burdens and order backlogs is ensuring that most companies take a knock on their turnover and growth.
The markets dragged L&T’s stock by over 3.5 per cent on Friday as its weak guidance eclipsed its 15 per cent jump in net profit (adjusted for last year's stake sale of Satyam). With projects getting deferred, delayed and renegotiations of existing contracts affecting plans, there has been a 21 per cent year-on-year drop in order inflows to Rs 16,096 crore in the September quarter in the engineering and construction (E&C) division, which generates 85 per cent of L&T’s revenue.
What’s worse is the company feels if the current conditions prevail, the order inflow growth could be a mere five per cent for FY12, which is far lower than its guidance of 15 per cent at the start of the financial year.
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Margins fell in all the core sectors such as engineering and construction, electrical and electronic segment and machinery and industrial segments on back of rise in material costs and interest rates. "If inflationary pressures continue, the ability to maintain margins will be difficult. Margin drop will persist,'' L&T’s Chief Financial Officer Shankar Raman said, estimating a 75-125 basis points (0.75-1.25 per cent) fall in margins in the engineering and construction sector.
Last year the company had predicted 13 per cent Ebitda (earnings before interest, taxes, depreciation and amortisation) margins in that segment. "About 30-35 per cent of our projects are on a fixed cost basis and we are unable to pass them,'' he said.
“It’s been a rough quarter and it looks like a rough year as well. The entire infrastructure sector and the construction companies that support them, are facing a serious confrontation with the slowdown. Decision making has slowed down as a result of which many decision of progressing projects has not happened. Large orders for the infrastructure and construction sector have dropped by 36 per cent over last year,” cautioned Ajit Gulabchand, chairman and managing director, HCC.
Gulabchand is not alone. L&T also echoes the sentiment. "Conditions have undergone a sea change. There has been a slowdown in investment and projects are getting reviewed. There is an intense competition. The business sentiment is low,'' says Shankar Raman. So, instead of the earlier estimated 15 per cent growth in order inflows, this year L&T expects the growth could only be around five per cent. Orders in engineering and construction segment (which account for 85 per cent revenue) fell by 23 per cent while that for the power sector fell by 16 per cent.
“One needs to stay a little cautious on this sector because the cycle still remains weak. As long as the cycle remains weak, serious performance won’t come in,” Lokesh Garg of Kotak Institutional Equities outlines his outlook.
HCC, for example, took a hit, posting a net loss of Rs 40.5 crore in the July-September quarter. A year ago, in the same period it clocked a profit of Rs 12.14 crore. With fresh orders slowing down, what is hurting most is its interest burden on a total debt of Rs 4,170 crore, which has gone up to Rs 107 crore in the second quarter from Rs 67 crore a year earlier.
| ON SLIPPERY PATH September quarter results (In Rs crore) | ||||||
| Sales | Y-o-Y (%) | OPM (%) | Y-o-Y (BPS) | Net profit | Y-o-Y (%) | |
| BHEL (E) | 9,953 | 19.5 | 18.5 | -110 | 1,295.0 | 11.9 |
| L&T | 11,245 | 19.0 | 10.4 | -20 | 798.0 | 15.0 |
| Crompton | 2705 | 12.8 | 8.4 | -550 | 1,18.3 | -45.0 |
| HCC | 228.6 | -6.3 | 11.3 | -150 | -40.5 | NA |
| Thermax | 1,303 | 19.4 | 10.8 | -100 | 102.0 | 13.6 |
| BHEL (E) Order inflow and margins are key to watch; L&T Lower margin and order inflow guidance; Crompton Higher interest, increased borrowing and rupee depreciation added to the woes; HCC Lower revenue growth, higher higher interest cost led to losses and could remain under pressure; Thermax Pressure on margins, not encouraging outlook and order delays and deferment is expected Source: Capitaline, company and analyst estimate. (E) estimate. BPS is for basis point, L&T net profit growth is adjusted. OPM is operating profit margin | ||||||
For a clearer perspective, the flagship project of HCC’s step down subsidiary – the hill township of Lavasa – is still stuck in a quagmire of regulatory clearances from the environmental ministry, resulting in a daily loss of Rs 2 crore.
“The fortunes of HCC is very much linked and synonymous with the fortunes of Lavasa. Honestly I am not seeing any relief coming on that front. Taking that into consideration, probably, the company is seeing the fate of Punj Lloyd. I expect that their order book or their core working is also getting eroded and they are not able to keep their margins intact. Their interest losses are increasing on a consolidated level too,” pointed out SP Tulsyan, an independent stock market analyst.
In Thermax’s case, both sales and net profit went up, but operating margins continued to trend down – declining 100 basis points year-on-year to 10.8 per cent due to change in revenue mix and increase in raw material costs. Analysts said the outlook is not so encouraging as pressure on EBITDA margins will continue and order inflows will remain subdued in near-term.
Meanwhile, disappointment for Crompton Greaves investors continue. Despite a 12 per cent growth in sales, net profits for the consolidated entity for the quarter declined 45.6 per cent over a year ago as significant increase in input costs and pressures on realizations dragged margins and squeezed profitability. Crompton banks heavily on transmission and distribution orders in the country for its mainstay, the power systems vertical. But with new plants not getting ready to generate electricity, its power transformers have less takers. What’s making matters worse are cheaper alternatives from Korea and China flooding the domestic market.
But despite continued sluggishness from the consumer products space -- which accounts for a fifth of its sales -- Crompton is gradually turning around since the June quarter. Consolidated net profits jumped 49 per cent to Rs 117 crore. Profit margins, especially in power systems too have recovered from the record lows of the first quarter of FY-12. Operating profit margins improved to 5.6 per cent in the latest ended quarter from 4.9 per cent.
“We had not anticipated the sharp drop in economy. We were also hit by the slowdown in the Chinese economy,’’ says the company’s Chief Executive Officer Laurent Demortier.