New orders and execution likely to remain subdued in Q2, say analysts

Some pin hopes on the NIP even as awards for FY21 and year after look bleak

Tendering and project award activity for the capital goods and engineering sector has almost doubled in July from a year ago. Despite the rise, analysts expect the July-September quarter to be a tough one —both for new orders and execution.

The significant year-on-year (YoY) rise in awards is driven by a low base effect due to elections last year.

Some also expect the current quarter to be worse compared to the January-March and April-June quarter performance in terms of new order wins. In addition, new order visibility for the remaining part of the year is limited to sectors like roads and water.

According to Emkay Research on capital goods and engineering, tendering activity, in the last month, grew by 120 per cent and awards doubled on a YoY basis. Rating agency ICRA, in a recent report, said that the first four months of the current financial year saw 166 per cent higher road project awards compared to the same period a year ago.

Both these agencies, however, caveated the data for a low-base effect as the year-ago period had an election impact. Most of the growth in order wins reported for July came from roads, railways, water and real estate segment, according to the Emkay report. 

“This quarter may be worse than January-March and April-June quarters. Backlog or pending orders from FY20 were mostly booked in the April-June quarter. Fresh award activity across customers was muted during Q2 so far,” said Renu Baid, vice-president — research — at IIFL. She added, “Projects, where tendering picked up in the current quarter, are expected to see finalisation mostly in the third quarter. Hence, do not expect anything exciting this quarter.”

Award wins announced in the current quarter by the country’s largest engineering conglomerate Larsen & Tou­bro (L&T) is not encouraging either. Since the start of July, L&T has made only one order announcement in the range of Rs 1,000 to Rs 2,500 crore. Others also point out that execution remains key for most capital goods and construction companies. “More than tendering, execution of orders is the key thing to be tracked. Preliminary data from steel and cement and key inputs for infrastructure execution are still weak for the quarter. Add to this, the consistent labour availability and consistent site operations need to be addressed. This may be another tough quarter, execution-wise,” said Nitin Bhasin, head of research at Ambit Capital.  

The road segment, however, has shown a marginal improvement in execution. The ICRA report on roads added — adjusting for the first 20 days of April 2020 wherein no construction activity was allowed — that the execution per day has shown a marginal growth of 3.5 per cent from 24.7 km/day in the first four months of FY20 to 25.6 km/day in FY21.

For the remaining part of the current financial year, few have hopes pinned on the National Infrastructure Pipeline (NIP). However, with a significant portion of the spend in the NIP expected from the states, awards for the current year and next financial year look bleak, according to analysts. 

“Overall, 24-26 per cent of the total NIP funding is planned from state’s budget, and annually, states’ contribution towards capex had remained around Rs 5 trillion,” said Shubham Jain, senior vice-president and group head for corporate ratings at ICRA. He added, “Now, with the pandemic, states’ priority and efforts will be more towards containing it as compared to announcing new projects. Some large states have explicitly announced significant cuts in their capex plans for the current year.” He further said, there may be more orders from roads and the water segment, but it is difficult to estimate how much they can make up for the lack of orders from other segments.