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Business News/ Industry / Manufacturing/  Capital goods revenues to stay under pressure in first quarter
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Capital goods revenues to stay under pressure in first quarter

Analysts predict robust growth for L&T, ABB, Thermax and decline in revenue for BHEL

The BSE Capital Goods Index has risen 34.9% in the quarter ended 30 June, while the benchmark Sensex gained 13.5% during the same period. Photo: Mint Premium
The BSE Capital Goods Index has risen 34.9% in the quarter ended 30 June, while the benchmark Sensex gained 13.5% during the same period. Photo: Mint

Mumbai: Capital goods companies are expected to continue reporting slow revenue growth in the first quarter of 2014-15, even as a positive outlook for the future indicates some green shoots, analysts said.

Although margins are projected to improve thanks to a lower base in the previous corresponding period, revenue growth will remain under pressure, according to a Mint survey of reports by six brokerages—Religare Capital Markets Ltd, Ambit Capital Pvt. Ltd, Kotak Securities Ltd, J.P.Morgan Securities Ltd, Motilal Oswal Securities Ltd and Edelweiss Securities Ltd.

“We expect the first quarter results to reflect improvement in operational metrics primarily on a favourable base, with revenue growth of 5% year-on-year versus a decline of 4% last quarter and likely operating margin expansion of 110 basis points (bps) year-on-year to 8.5%," Religare analysts Misal Singh and Abhishek Raj said in a 15 July report.

One basis point is one-hundredth of a percentage point.

Capital goods companies are expected to continue bearing the brunt of slow project execution, limited domestic orders and tight liquidity in the June quarter.

According to Edelweiss, the sector’s revenues are expected to grow 3% year-on-year. “Order intake of most companies under our coverage is likely to be flat owing to lacklustre domestic markets and margins are set to improve by 100 bps on a low base and gross margin expansion," the brokerage said in a note on 7 July.

Analysts, however, are bullish about Larsen and Toubro Ltd (L&T ), India’s largest engineering company. On 2 June, the company had reported an 11.08% increase in revenue and a 71% jump in net profit for the March quarter.

The management had said that it expected order intake to grow by 20% in 2014-15. For the June quarter, Religare estimates L&T will post a “healthy growth (in revenue) of 13% year-on-year led by strong order book," while Motilal Oswal expects an 11% rise in the company’s revenues.

Meanwhile, state-owned power equipment manufacturer Bharat Heavy Electricals Ltd (BHEL) is expected to post a 14% decline in revenue, according to Motilal Oswal.

“For BHEL, we expect a modest revenue decline over contracted base and margin contraction to continue (on negative operating leverage) and we see risks to its margins from low demand, related competition and changes in the mix," a Kotak Securities report on 7 July said.

According to analyst estimates compiled by Bloomberg, ABB Ltd and Thermax Ltd are projected to post revenue growth of 5% and 11% respectively.

While the June quarter is expected to remain sluggish, companies are slowly starting to indicate a revival in the coming quarters.

“We are very confident about the Indian markets and we continue to believe that the markets will recover and some of the projects that were struggling in the last two to three years, specially in the power segment, will take off now," said N. Venu, president and head of power systems at ABB India Ltd. “Some of the projects that we could not book in the first quarter, you may see announcements in the current quarter," he added.

The Union budget proposed several measures to revive the country’s power and infrastructure sectors, including extension of the 10-year tax holiday for power generation companies, introduction of infrastructure investment trusts and encouragement to long-term infrastructure financing by banks.

“The new infrastructure drive, over the longer term, will be positive for the steel, cement and capital goods industries, which will benefit from rising demand," Fitch Ratings Inc. said in a report on 13 July.

Most brokerages also believe the second half 2014-15 will show an improvement in earnings of capital goods companies.

“With a clear focus of the new government on investment climate revival, improvement in overall liquidity to infrastructure sector and new project announcements in infrastructure space (metro, roads, rail, water, power etc) we expect overall capital expenditure to pick up over next 10-12 months, which might impact the second half of fiscal 2015 earnings positively," analysts Amit Mahawar, Rahul Gajare and Swarnim Maheshwari said in the Edelweiss report.

The BSE Capital Goods Index has risen 34.9% in the quarter ended 30 June, while the benchmark Sensex gained 13.5% during the same period.

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Published: 20 Jul 2014, 09:50 PM IST
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