Capital goods: local demand, not exports, to lead recovery

September quarter is likely to see the benefits of a consumption-led recovery in some pockets on home ground trickling down into capital goods companies


Bharat Heavy Electricals Ltd and Larsen and Toubro Ltd, the sector heavyweights, are likely to gain from a tepid base of the year-ago period and improved execution on the order backlog. Photo: Priyanka Parashar/Mint
Bharat Heavy Electricals Ltd and Larsen and Toubro Ltd, the sector heavyweights, are likely to gain from a tepid base of the year-ago period and improved execution on the order backlog. Photo: Priyanka Parashar/Mint

In spite of the laments about a persisting weak investment cycle, there is a consumption-led recovery in some pockets on home ground.

The September quarter is likely to see the benefits of this trickling down into capital goods companies. Most brokerage firms have forecast a strong double-digit growth in revenue and a stronger growth between 30-50% in net profit that has already fuelled the outperformance of the BSE Capital Goods index as against benchmark indices.

But the sector’s performance will be mixed.

Companies with significant dependence on domestic markets will drive recovery.

Bharat Heavy Electricals Ltd and Larsen and Toubro Ltd, the sector heavyweights, will gain from a tepid base of the year-ago period and improved execution on the order backlog.

Of course, the latter has been relatively insulated from the downturn due to its diversified nature.

Then there are companies that would clock revenue traction on the back of government spending in the last 12 months on infrastructure. Capital goods firms like Alstom T&D, Siemens Ltd and ABB India Ltd that cater to power transmission and distribution will clearly post revenue traction in the September quarter. This segment has gained from orders given out by Power Grid Corp. of India Ltd, which is committed to the government’s Make in India initiative whereby locally manufactured equipment is given priority to minimize low-cost competition from Chinese counterparts.

That said, those with high dependence on the industrial segment and exports like Thermax Ltd, Crompton Greaves Ltd and Cummins India Ltd to some extent are unlikely to do well in the quarter. A Motilal Oswal Securities Ltd report reiterating this says, “Indian machinery exports have decelerated due to factors such as weak global demand, geopolitical concerns and sharp currency volatility across several markets. Also, falling crude prices had an adverse impact on global trade and thus investment demand.” These firms could post a lacklustre performance in the September quarter.

The entire capital goods sector’s performance will still show higher working capital requirements. However, the multinational firms have in the last six-eight quarters restructured operations to trim costs drastically. The benefits of this, which were seen in the previous quarter, will continue to accrue in the September quarter too.

Another dampener may be weak order inflows. The traction seen in public sector infrastructure spends since January this year, petered out in the September quarter.

Hopes of a strong revival in the capital goods sector had already led to stocks running up. But it seems the Street has taken cognizance of a relatively slow paced recovery in the segment. The BSE Capital Goods index, having run-up since January, has lost steam in the recent past.

As Edelweiss Securities Ltd puts it in a preview report for the quarter, “Broad-based industrial capex recovery is likely to be gradual given that overall corporate utilisation and consumption are still way below levels warranting fresh capex.”

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