On an aggregate basis, the capital goods and engineering companies under our coverage reported a 28.2% growth in revenues for Q3FY2009.
The revenue growth was marginally above our estimate. Larsen and Toubro (L&T) and Punj Lloyd reported a strong topline growth. The revenue growth of the mid-caps was broadly in line with our expectations.
As expected, the operating performance of these companies remained under pressure due to a higher raw material cost.
The softening prices of raw materials should help to improve their operating performance going forward.
The profitability of the companies under our coverage was also dented by an increase in their interest cost, as companies across the board saw stretched working capital needs.
As a result, the aggregate profits of the companies under our coverage grew by 8.8%, which was lower than our estimate.
During the quarter the larger companies continued to see decent order flows. BHEL particularly continued to witness a strong growth (+39% y-o-y) in its order inflows.
Going forward, the order inflows for the companies in the capital goods sector will remain under pressure against the backdrop of a slowing demand and a cut in the capital expenditure of corporates.
Further, though currently their order book remains robust, these companies face the challenge of executing these orders on schedule due to the strain on their working capital cycle and the ongoing liquidity crunch.
This could, in turn, affect the revenue growth of these companies in future. Some respite would come from the falling raw material prices, which might reduce the pressure on their margins from the next quarter onwards.
Our top picks in the sector are BHEL and Crompton Greaves amongst the large players while Sanghvi Movers is our preferred buy in the mid-cap space.