The December quarter performance of capital goods companies doesn’t leave much scope for a positive outlook. If some companies like Siemens Ltd registered a 6% decline in revenue, others like Crompton Greaves Ltd (CGL) and KEC International Ltd (KECIL), in spite of a reasonable growth in revenues, posted lower profits when compared to a year ago.
Siemens shocked investors as it recorded only one-fourth the net profit posted a year before. CGL and KECIL sailed in troubled waters too, with net profit plunging 67% and 50% respectively from the year-ago period.
Photo: Bloomberg
The December quarter results mirror the problems haunting capital goods firms. Material cost as a percentage of sales increased across the board in spite of softening commodity prices, due to either poor pricing, low revenues or the impact of a depreciated rupee which makes imports expensive. For instance, soft 6% y-o-y revenue growth in Thermax Ltd was one of the reasons for a 110 basis points dip in operating margin to 10.7% during the quarter.
Making matters worse is the global environment. CGL’s profitability across sectors, namely power and industrial systems, was hit largely as overseas subsidiaries, which account for almost half its revenues, did not perform well. Operating margin shrank by about 810 basis points y-o-y to 6% in the quarter.
Poor order inflow is still the biggest concern for the sector, because the absence of fresh orders is a challenge to medium to long term earnings growth. For example, Bharat Heavy Electricals Ltd’s 59% y-o-y decline in order inflows was a negative surprise, as was the cancellation of orders. Mid-cap firms like Thermax which have a reasonable exposure to the private sector also saw a 40% dip in y-o-y order inflows. An Edelweiss Securities Ltd report says that stagnating power sector order book and declining margins are the main pain-points for the sector.
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“The scenario may not get optimistic unless there is an uptick in mega project orders, which hinges on policy reforms in power and land acquisition,” says John Perinchery, senior analyst, Asian Market Securities Ltd.
Sluggishness in fresh orders implies low customer advances which along with project delays has led to spiralling interest costs, visible across firms during the December quarter. The silver lining here is that most capital goods firms are not highly leveraged when compared to their infrastructure counterparts, hence any recovery in operating profitability will immediately reflect in higher profits.
But a near-term recovery is improbable. You could argue the business has hit a trough, which is perhaps why the BSE capital goods index was rising since October, when policy makers hinted at easing liquidity. But stocks are again shedding gains of the last three months. Post December results, most brokerages have downgraded fiscal 2012 earnings by about 5%. A bigger dampener is the 10-15% downgrade for fiscal 2013 earnings, as weak order momentum leaves little hope for better earnings.
Graphic by Yogesh Kumar/Mint
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