Results preview: Order-book booster to stay for capital goods firms

Key monitorables include tender pipeline and emerging supply-chain scenario, say analysts and players

Public and private-sector capital expenditure (capex) is expected to aid year-on-year (y-on-y) topline and bottomline growth of capital goods companies in the second quarter of the ongoing financial year (Q2FY23). Sequentially, too, numbers on both fronts are expected to show an improvement, sector experts said, as order inflows have remained robust during the period.
 

While commodity prices softened during the July-September period, recession and rupee depreciation concerns remain. On Tuesday, the International Monetary Fund (IMF) cut India’s FY23 GDP forecast to 6.8 per cent from 7.4 per cent projected earlier.

The body joined the World Bank, which last week revised the GDP forecast to 6.5 per cent from 7.5 per cent indicated in June. It cited spillovers from the Russia-Ukraine war and global monetary tightening to weigh on the Indian economy.
 

Analysts tracking the capital goods sector expect a nearly 10 per cent revenue growth and 13.4 per cent profit after tax (PAT) growth on a year-on-year basis for companies operating in the space. This includes names such as Larsen & Toubro (L&T), Thermax, ABB and KEC International, according to data compiled by BS Research Bureau.
 

Quarter-on-quarter (q-on-q), both revenue and PAT growth, will likely grow by 10 per cent and 33.1 per cent each for players within this universe, BS Research data shows. Growth in earnings before interest tax depreciation and amortisation (Ebitda) in Q2 versus Q1 of the current fiscal year is likely to be 12.5 per cent. When compared to the year-ago period, Ebitda is likely to show a growth of four per cent, BS Research data shows. 
 

“A few factors augur well for capital goods. Commodity prices such as steel, aluminium and copper are cooling off, which is a relief. At the same time, tendering activity in sectors such as railways and transmission and distribution have shown an uptick,” says Vimal Kejriwal, managing director and chief executive officer, KEC International.
 

KEC, for instance, announced nearly Rs 4,500-5,000-crore worth of orders in Q2, according to analysts tracking the company. Larsen & Toubro, the sector leader, on the other hand, announced orders in the region of Rs 10,000-17,500 crore in Q2 across segments such as hydrocarbons, power, water treatment and heavy engineering.

 

“Overall, order inflows have remained strong in Q2,” said analysts Chirag Shah, Vijay Goel, Ameya Mahurkar and Yash Panwar of Mumbai-based brokerage ICICI Direct Research. “Tendering activity, too, has been robust across sectors such as transmission & distribution, green energy, data centres, railways, water, transportation and infrastructure,” they said.
 

But there are risks ahead, some experts said. One is firming fuel costs, which could weigh on margins. The second is project execution delays, which could impact order inflows in the quarters ahead.
 

The price of crude oil — below $100 a barrel for now — has been firming up following a recent cut in production announced by the Organisation of the Petroleum Exporting Countries plus (OPEC+). It now stands at $95.21 a barrel. It had slipped to almost $80 a barrel last month from more than $120 a barrel over three months ago.
 

The London Metal Exchange, on the other hand, continues to be weak, down 31 per cent year-to-date, according to data from the exchange. Year-to-date, the rupee has depreciated by nearly 10 per cent to the dollar amid economic uncertainties. 
 

“Though order inflows have remained strong in Q2, key monitorables include the tender pipeline going ahead and an update on the supply-chain scenario,” Amit Anwani and Nilesh Soni, analysts at Mumbai-based brokerage Prabhudas Lilladher said in their Q2 preview of the sector.
 

Some experts pointed to the challenges from an increase in cost of capital for capital goods companies due to sustained interest rate hikes. “The overall interest rate cycle has been picking up as the Reserve Bank of India looks to tackle inflation,” said MS Unnikrishnan, capital goods veteran and former MD of Thermax. “This is a near-term concern,” he said.