When engineering and construction company Larsen and Toubro Ltd (L&T) declared its annual results earlier this month, it gave a bright outlook for the current financial year, saying it expected order inflow to grow 15-20 per cent.
Engineering company Thermax Ltd, too, projects a similar outlook.
L&T expects the orders deferred in the fourth quarter of the last financial year to come in this year, boosting the company’s order book. It hopes to get Rs 10,000-15,000 crore of deferred orders in the coming quarters.
According to a research report by financial services firm Avendus Capital, L&T’s order inflow in 2011-12 declined 12 per cent, compared with the management’s guidance of a five per cent growth, primarily affected by project deferrals and uncertainties in the sector.
Though Thermax did not give details of the expected orders, M S Unnikrishnan, MD, said the company was in talks for a couple of projects. He said the second half of the current financial year could turn for the better if the macro-economic situation improved.
Currently, financing costs and rupee depreciation, among other factors, have led to a record number of projects moving into the freeze mode, resulting in reduction in capital expenditure of companies. The railway and road sectors, however, are expected to keep the boat afloat this year.
At 6.5 per cent, the country’s GDP growth in 2011-12 dropped below seven per cent for the first time since 2008-09. This was even lesser than the government’s projected expansion of 6.9 per cent.
Thermax’s Unnikrishnan believes there is innate demand, which will convert to orders if the economy improves. “If you look at companies' balance sheet, many of them are making profits. Cash positive companies will invest,” he said.
Analysts, however, are sceptical of deferred orders coming to the rescue of the construction companies struggling shrinking order books. “A year back, too many companies said deferred orders would come. If they come in, yes order inflow will improve. But, there is no timeline on when deferred orders would come,” said Sailesh Kanani, research head at financial services firm Violet Arch Securities.
Construction companies dependent on the power sector are the worst-affected. For instance, Reliance Infrastructure Ltd, the Anil Ambani-led firm that depends mostly on internal projects, is positive about its construction business margins at eight per cent, with an orderbook of Rs 17,280 crore.
However, the status of a massive order the company recieved from the Krishnapatnam power project, being developed by another Ambani firm Reliance Power Ltd in Andhra Pradesh, is still unclear as the power project is now awaiting government’s decision on power purchase agreements, said a person aware of the development on condition of anonymity.
Besides, power companies such as GMR Energy Ltd, GVK Power and Infrastructure Ltd, Adani Power Ltd and Tata Power Ltd said they had frozen new projects for now, owing to coal supply issues among others.
Companies banking on orders from the power sector are still in a gloom. “Capital goods companies are still talking about slowdown, and power sector orders are still in problem,” said Kanani.
But it’s still not completely gloomy. With the National Highways Authority of India hoping to bid out road projects of around 8,500 km this year, the road sector might be a saviour. Parvez Umrigar, CEO of Welspun Infratech Ltd, is one of those who sees the highway sector coming out with contracts.
Road projects have been offering steady orders in the last few years. In the last financial year, NHAI awarded projects worth Rs 56,939 crore, and gave away Rs 2,310-crore projects in January alone. It had set a minimum achievement target of 7,300 km for 2011-12, up by 43.6 per cent from last year’s 5,083 km. Since last year, NHAI has set up month-wise targets in awarding projects to ensure a continuous flow of projects. Besides, the railway sector has also started looking up with the Dedicated Freight Corridor Corporation planning to award projects worth Rs 10,000 crore this year.
“There will be sporadic opportunities. Like the railways where orders might come as work on the freight corridor progresses, the Delhi Metro's second stage expansion will also create orders,” said Umrigar.
