Revenues should see robust growth, but margins could be under some pressure.
The BSE capital goods index has outperformed the market since the start of July falling 10 per cent compared with a decline of 13 per cent in the Sensex. Given that companies have been able to execute the projects they had on hand, companies should have grown revenues by 23-26 per cent y-o-y in the September 2008 quarter.
However, operating profit margins (opm) would be under pressure because prices of raw materials were still high. Moreover, the depreciating rupee ---the rupee lost about 7 per cent against the dollar during the quarter--would hurt companies that made imports.
ABB, for instance, made fairly large imports and therefore, its margins may fall slightly. That’s despite the fact that revenues, for the Rs 5,930 crore firm, should be higher by 26-28 per cent, a better performance than the 15 per cent posted in the June 2008 quarter. ABB should also have seen more orders coming in –in June it had bagged orders worth just about Rs 2,200 crore. The firm’s top line growth has been disappointing of late because it is implementing several long gestation projects.
Larsen and Toubro however may be able to maintain margins despite high raw material costs, as it did in the June quarter when it posted an opm of 9.5 per cent, mainly because it saw a strong top line growth of 53 per cent. For the September quarter too, net sales for the firm are expected to grow at around 28-30 per cent and therefore, margins should be at similar levels. L&T builds in cost escalation clauses into 70 per cent of its contracts for engineering and construction which is important because this segment contributes about 60 per cent to the firms’ consolidated revenues.
The Rs 19,765 crore BHEL’s costs, however, may rise because it needs to pay higher wages and that could push down operating margins by about 50-100 basis points. The good news is that orders worth more than Rs 10,000 crore have come in during the September quarter – adding to an already robust order book which stood at Rs 95,000 crore in June 2008. Thus, revenues are expected to grow by a strong 25-27 per cent. Revenues for Crompton Greaves, which were up 34 per cent in the June quarter, driven by a 52 per cent y-o-y rise in the international operations, too should be strong with the domestic business expected to grow at 22-23 per cent y-o-y.
But despite steel and copper prices having come off, in the last two months, on a y-o-y basis they remain high and that could mean a flat or lower opm. Crompton’s order book stood at nearly Rs 10,000 crore at the end of June. Forward price-earnings multiples for capital goods firms range between 24 times for ABB, 19 times for BHEL and just under 17 times for L&T and Crompton. Valuations have corrected sharply and the stocks are now reasonably valued.