 "Weak earnings growth in Q4 for capital goods firms")
Weak consumer demand across sectors and the government’s spending cuts to achieve the year’s fiscal deficit target are likely to have an overhang on the Q4 results, said Tirthankar Patnaik, India strategist at Mizuho Bank.
“The Q4 earnings (growth) will be muted, on the back of lower capacity utilisation, inventory writedowns, higher working capital cycle and delayed project execution,” according to Nilesh Shah, managing director of Kotak Mahindra Asset Management. “Order inflows of engineering and infrastructure companies have slowed, except in road construction. Order execution has also been below expectation and this will impact revenue. Also, as a result of correction in commodity prices, companies which acquired inventories at a higher price will have to book losses.”
Over the past six months, the prices of steel, aluminum and copper declined 20-30 per cent. Companies which acquired inventories at higher prices will take a hit. Broking houses are estimating a combined one to two per cent revenue growth across capital goods and engineering companies. And, factoring in a combined 16-22 per cent drop in net profit for companies in this space.
Weak performance at Bharat Heavy Electricals (BHEL) and Larsen & Toubro (L&T) are expected to drag down the overall sectoral result. BHEL in its provisional result for FY15 said net profit would be 62 per cent lower and revenue by 23 per cent.
Brokerages also expect an impact on L&T’s profit margins, due to weakness in its hydrocarbon, power and other business. However, project execution in the infrastructure and construction segments is expected to be strong. Revenue is expected to grow 7.5-14 per cent, according to analyst estimates. L&T has already lowered its order expectation growth to 15-20 per cent from 20 percent at the start of the financial year, anticipating delays in booking.
"Although the change in government has improved the business sentiment significantly, this has not translated in project finalisation and, hence, awarding of orders," Kotak Securities wrote in a results' preview note.
"We expect uptick in overall investment in power, roads, ports, airports, etc, especially from the private sector, over the next five to six quarters," said Edelweiss Securities.
Analysts also expect a pick-up in orders and executions in power transmission and distribution, and the defence sector.
Phillip Capital is forecasting 11% revenue growth and a 23 rise in profit for Alstom T&D. Siemens is expected to have modest revenue growth but will see improvement in margins due to cost saving. Crompton Greaves is expected to see a reduction in losses in its foreign business.