After an outperformance in Q2FY2009, the sector underperformed the broader markets in Q3FY2009 amidst growing concerns of slowdown in order inflows and liquidity crunch.
The third quarter saw the capital goods index underperform the benchmark index as the BSE Capital Goods index declined by 34.8% as against a 26.1% decline witnessed by BSE Sensex.
The capital goods index in the monthly index of industrial production (IIP) numbers continued to be volatile, as it rose by 3.1% in October 2008, though on a very high base of 20.9% of October 2007.
The base effect would continue to have an impact for the coming couple of months due to high base of November 2007 (24.2%) and December 2007 (17.6%).
The heavyweights continued to impress in terms of order inflows with Larsen and Toubro (L&T) and Bharat Heavy Electricals Ltd (Bhel) reporting a number of order wins during the quarter.
The management of L&T has yet again reiterated its view of achieving a 30% order inflow for the current fiscal. However, the order inflows appeared to have dried up for smaller and mid-sized companies, as the affect of the slowdown became more pronounced due to liquidity crisis.
The companies relying on private capital expenditure (capex) will continue to face greater pressure, as corporates cut down their capex plans amidst the slowdown, while companies such as Bhel, which are primarily relying on public spend, are not likely to see much slowdown in their order inflows.
Moreover, with PGCIL already floating tenders worth about Rs2,700-2,800 crore and in the process of doing many more, the order inflows for transmission & distribution (T&D) sector is likely to pick up in the coming times.
The growth in the current year would still continue to be driven by the existing strong order book position for most of the companies, though for future growth we continue to actively monitor the order inflows for all the companies in the sector, particularly those for mid-sized and smaller companies.
Key raw material prices eased significantly during the quarter, with the base metal prices currently trading at multi-year lows. However, the impact of the same is unlikely to be felt in the current quarter, as the bulk of the raw material booking for the orders executed during the present quarter had been done earlier at higher prices.
Hence, the impact of softening prices would only be felt with a lag of couple of quarters, and we should be able to see the benefits from the next quarter.
Lack of funding, execution delays and further cuts in the private capex remain primary concerns for the sector and future performance of the companies.
Lately, we have noticed a number of infrastructure projects getting delayed on account of funding constraints or funding gap, which could potentially delay the execution of these projects.
Though the government has reacted well, offering a number of measures to facilitate infrastructure funding through its stimulus packages, the risks still loom large over the industry.
For the quarter ended December 2008, we expect our capital goods universe to report a top line growth of 24.7% and a bottom line growth of 14.3%. Our preferred BUYS in the sector are Bhel, Crompton Greaves and Genus Power Infrastructures.