Capital goods: Mixed bag performance due to Ind-AS norms
Capital goods firms put up a decent show in the June quarter as they stepped up the pace of execution. However, the new Indian Accounting Standards (Ind-AS), mandatory for Indian firms from FY17, proved to be a drag on revenue and earnings.
To begin with, consolidated revenue of most firms was below forecasts. This was because large firms such as Larsen and Toubro Ltd (L&T) and Crompton Greaves Ltd have many subsidiaries. Under the new norms, subsidiary performance adds up in the consolidated results only at the profit level. Besides, the performance of these large firms hinges on macroeconomic and industrial recovery that is still elusive.
Strangely, public-sector firm Bharat Heavy Electricals Ltd that was condemned for poor performance by investors over many quarters in the past lifted investor sentiment with a 29% jump in revenue, beating analysts’ forecasts. Focus on shorter gestation projects and the fact that some large projects were close to completion did the trick.
Likewise, ABB India Ltd, the Indian arm of the multinational capital goods manufacturer, posted robust growth in both revenue and profit by focusing on short-cycle projects. Also, firms with a reasonable exposure to retail consumption products such as air-conditioners and bulbs did well, clocking double-digit year-on-year growth in revenue. Havell’s India Ltd and Voltas Ltd fall in this category.
However, Ind-AS accounting marred profit performance for firms that have a higher exposure to industry. The norms specify more stringent provisioning for receivables—which have been increasing due to the poor financial health of customers of capital goods firms. Higher provisioning hurt profitability in many cases. For instance, L&T’s operating margin of 9% was way below the Street forecast and lower than a year ago. The provisioning norms and treatment of income from joint ventures and subsidiaries may take a few more quarters to stabilize for a meaningful comparison with the previous quarters.
That apart, the cloud of weak order inflows still looms. Although some firms such as Siemens Ltd and KEC International Ltd may get new orders in the power transmission segment, most would have to wait for at least 12-18 months for a robust capex cycle recovery.