Results preview: Profit of capital goods cos may stay the course in Q2

Margin improvement anticipated in Q2FY24 results amid lower costs

Capital goods companies in their Q2FY24 results are expected to report another steady quarter of earnings growth as order inflows and execution remain healthy, according to analysts. An upward revision in order inflow targets and a margin improvement due to lower raw material costs are also anticipated.

“We expect the execution of all capital goods companies and most EPC (engineering, procurement, and construction) companies to remain healthy Y-o-Y (year-on-year), led by strong order book accretion in the past 5-6 quarters,” wrote analysts at Kotak Securities in a note, estimating revenue growth of 32 per cent for India’s largest company in the capital goods space -- Larsen & Toubro.

Revenue growth estimates by brokerage firms Nirmal Bang, Phillip Capital (ex-L&T), Kotak Securities, and Prabhudas Lilladher for revenue growth in the September 2023 quarter were in the range of 11.8 per cent-19 per cent.  The Y-o-Y growth estimates for profit after tax (PAT) ranged from 17 per cent to 31 per cent.

Equity research firm Philip Capital expects a 60 per cent Y-o-Y rise in the combined order inflow for companies under its coverage. A large share of this, Philip Capital said, is driven by an estimated 64 per cent increase in L&T’s order inflows.

L&T reported significant growth in order inflows in the June 2023 quarter at 57 per cent Y-o-Y. Analysts now expect &T to outperform itself in growth rates. Those at Centrum anticipate an upward revision of L&T’s revenue and order inflow guidance for FY24.

At the start of the year, L&T guided for a 12-15 per cent rise in revenue and a 10-12 per cent increase in order inflows for the full year.

Analysts note that both domestic and key export markets, such as West Asia, the Americas, Saarc, and Africa, have contributed to the sector’s new order wins. Segments, such as power transmission & distribution (PT&D), defence, transportation infrastructure, water, and data centres have seen order-win traction.

For Q2FY24, capital goods companies are also expected to report margin gains from easing commodity prices. “We expect a 140 basis points year-on-year improvement in the Ebitda (earnings before interest, taxation, depreciation, and amortisation) margin of our coverage companies due to easing raw material costs, lower freight costs, and better supply chain dynamics,” wrote analysts at Nirmal Bang.

In the management commentary, alongside revised order inflow guidance, analysts shall look for other key monitorables of margin guidance, demand outlook, order/ inquiries pipeline, and working capital management.