The performance in the December quarter is likely to be stable, but pace of order inflows needs to be monitored.
In addition to healthy growth in revenues of large companies like Bharat Heavy Electricals (BHEL) and Siemens, overall growth is expected to be propelled by mid-sized companies such as Thermax, KEC International, Cummins India and BGR Energy.
Operating profit margins (OPMs) are likely to be maintained at around 15 per cent due to high raw material (mainly steel and copper) costs. Analysts expect OPMs of companies such as Bharat Electronics, BHEL and Siemens to post substantial contraction. However, net profit margins may jump 106 basis points to 10.9 per cent, despite higher interest rates, as most companies are either debt-free or have low gearing.
Investors need to keep a watch on the pace of order inflows due to tough competition (in power equipment and T&D sectors) and a slowdown in award of contracts by Power Grid Corporation of India. In a high interest rate scenario, they also need to monitor orders from the industrial sector, apart from placing of orders by infrastructure companies as well as bottlenecks such as land acquisition, environmental clearances and liquidity constraints.
Analysts advise a watch on companies with considerable international exposure (Crompton Greaves, Havells India, KEC International and Voltas), as order inflows have picked up.
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The Bombay Stock Exchange Capital Goods Index declined six per cent in the December quarter, as compared to a flat movement in the Sensex.
Consequently, the average valuation of 16 times 2011-12 estimated earnings looks reasonable, given the pick-up in execution. The outlook continues to be bright on the back of strong growth in the gross domestic product (8.9 per cent in the first half of 2010-11) and robust Index of Industrial Production numbers.