 "Unresolved issues, demand stagnation mar capital goods sector revival")
Indicators are hinting the economic momentum is back. The Index of Industrial Production shows capital goods output rose 11 per cent in April. Slow-moving projects are reviving, and medium and heavy commercial vehicle sales are picking up.
But a revival in the capital expenditure cycle for key industries and a rise in orders for capital goods companies were expected only from the second half of 2015-16, said chief executives and analysts. Excluding Bharat Heavy Electricals and Larsen & Toubro, capital goods companies are struggling to bag projects.
“We are expecting a gradual improvement in orders. With the completion of the first year of the National Democratic Alliance government, the focus will be on execution. The reduction in the repo rate is also a positive for credit growth. But capacity utilisation in cement and steel remains at 65-70 per cent. Consumption needs to grow and utilisation to rise before companies plan capacity expansion,” said M S Unnikrishnan, managing director of Thermax.
“It is not liquidity that is impacting orders but lack of demand from end-users,” Kotak Institutional Equities had said in a fourth-quarter results note about ABB India. The order flow in the capital goods industry is linked to revival of project capital expenditure. Unless issues pertaining to stalled projects are resolved, fresh investment will be limited.
According to Rathin Basu, president of Alstom India, the outlook for the power sector is challenging as non-performing asset issues stay unresolved, banks remain reluctant to lend to the industry, and land acquisition concerns linger.
While the power and oil and gas sectors were expected to receive some orders this year, big-ticket metro and railway projects would start from 2016-17, analysts said. Projects like smart cities and the coastal road in Mumbai were still on the drawing board and would not come up for ordering any time soon, executives said.
A report by Motilal Oswal said orders valued at Rs 10,300 crore were awarded in May against an average Rs 17,000 crore in the past 12 months. The bulk of awards in May went to road laying and power transmission and distribution works.
June witnessed one of the biggest orders in the power sector, with Bharat Heavy Electrical Ltd securing a Rs 18,000 crore contract for setting up a 4,000 Mw plant in Telangana. The renewable energy sector is also seeing activity in the form of merger deals and investment announcements.
“While the outlook for the capital goods industry does not look encouraging, there are a few bright spots such as green energy. Investment appetite is back in the market as is evident from SunEdison's acquisition of Continuum Wind Energy and Softbank's announcement of a $20 billion investment in solar projects in India. Over the next 18 months we could see three-five Gw of solar power added, and this will open up opportunities for engineering-procurement-construction players and component makers,” said Rupesh Agarwal, partner, BDO, an advisory firm.
Analysts are expecting a turnaround over the next six months to a year with the impetus coming from further rate cuts and government spending. The stock market, too, is building on this optimism with the capital goods index rising 13 per cent this year, outperforming the Sensex, which has remained flat on a year-to-date basis.
A Morgan Stanley Research report said the growth momentum would pick up from the second quarter and exports could rise in the second half of 2015-16 on a gradual recovery in global growth. Deutsche Bank expects projects worth $300 billion to start between 2015-16 and 2017-18. It said $6 billion could be invested in the power sector in 2015-16 but metro projects would come up for ordering from 2016-17.
But a revival in the capital expenditure cycle for key industries and a rise in orders for capital goods companies were expected only from the second half of 2015-16, said chief executives and analysts. Excluding Bharat Heavy Electricals and Larsen & Toubro, capital goods companies are struggling to bag projects.
“We are expecting a gradual improvement in orders. With the completion of the first year of the National Democratic Alliance government, the focus will be on execution. The reduction in the repo rate is also a positive for credit growth. But capacity utilisation in cement and steel remains at 65-70 per cent. Consumption needs to grow and utilisation to rise before companies plan capacity expansion,” said M S Unnikrishnan, managing director of Thermax.
“It is not liquidity that is impacting orders but lack of demand from end-users,” Kotak Institutional Equities had said in a fourth-quarter results note about ABB India. The order flow in the capital goods industry is linked to revival of project capital expenditure. Unless issues pertaining to stalled projects are resolved, fresh investment will be limited.
According to Rathin Basu, president of Alstom India, the outlook for the power sector is challenging as non-performing asset issues stay unresolved, banks remain reluctant to lend to the industry, and land acquisition concerns linger.
While the power and oil and gas sectors were expected to receive some orders this year, big-ticket metro and railway projects would start from 2016-17, analysts said. Projects like smart cities and the coastal road in Mumbai were still on the drawing board and would not come up for ordering any time soon, executives said.
A report by Motilal Oswal said orders valued at Rs 10,300 crore were awarded in May against an average Rs 17,000 crore in the past 12 months. The bulk of awards in May went to road laying and power transmission and distribution works.
June witnessed one of the biggest orders in the power sector, with Bharat Heavy Electrical Ltd securing a Rs 18,000 crore contract for setting up a 4,000 Mw plant in Telangana. The renewable energy sector is also seeing activity in the form of merger deals and investment announcements.
“While the outlook for the capital goods industry does not look encouraging, there are a few bright spots such as green energy. Investment appetite is back in the market as is evident from SunEdison's acquisition of Continuum Wind Energy and Softbank's announcement of a $20 billion investment in solar projects in India. Over the next 18 months we could see three-five Gw of solar power added, and this will open up opportunities for engineering-procurement-construction players and component makers,” said Rupesh Agarwal, partner, BDO, an advisory firm.
Analysts are expecting a turnaround over the next six months to a year with the impetus coming from further rate cuts and government spending. The stock market, too, is building on this optimism with the capital goods index rising 13 per cent this year, outperforming the Sensex, which has remained flat on a year-to-date basis.
A Morgan Stanley Research report said the growth momentum would pick up from the second quarter and exports could rise in the second half of 2015-16 on a gradual recovery in global growth. Deutsche Bank expects projects worth $300 billion to start between 2015-16 and 2017-18. It said $6 billion could be invested in the power sector in 2015-16 but metro projects would come up for ordering from 2016-17.