Capital goods: Public sector investments the only reprieve
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If order inflows are any barometer for future performance of India’s capital goods firms, then trends in the March quarter results provide no major reprieve.
Companies with a wider product portfolio and exposure to government-led investments did well. Firms more dependent on private sector investments delivered a muted performance.
Siemens Ltd, referred to as the trains-to-turbines company, reported a 96% year-on-year jump in order inflows. Order inflows at ABB India Ltd grew 28%. Traction in the transportation sector, led by railways, helped ABB India maintain the momentum in order inflows. Siemens said its business focused on government spending is doing well.
“Our public sector business is growing well with focus by the government on the transmission and distribution of power as also on modernizing the Indian Railways,” Siemens said in a statement.
Both the companies not only sounded optimistic about future prospects but also delivered decent performances for the March quarter. The positive momentum is not seen in other companies’ results.
Order inflows fell sharply at Thermax Ltd, reflecting the weak private sector investment trends in the domestic economy. Comparatively, Bharat Heavy Electricals Ltd (Bhel) and Larsen and Toubro Ltd (L&T) reported decent growth in order inflows for the March quarter. But it provided limited cheer. The earnings performance was unexciting.
Concerns about slow-moving orders in Bhel’s order book and declining scope for investments in conventional energy are crimping the company’s earnings outlook. “We continue to believe slow-moving projects could jostle the earnings next year,” IDBI Capital Markets and Securities Ltd said in a note.
L&T’s revenue and operating profit trailed Street estimates. It posted double-digit growth in order inflows for the March quarter but missed the full year order inflow guidance. Even then, it guided for 12-14% order inflow growth guidance for the current fiscal.
But conviction about L&T’s performance is a bit low, given the weak private sector investments in India and mixed outlook in West Asia, a key market. According to Jefferies India Pvt. Ltd, the political standoff between Qatar and other West Asian countries can pose risk to ordering activity in the region.
“Qatar accounts for 21% of awards in the key markets, and any disruption here could see FY18E awards being flat to negative,” Jefferies added. If investments in India remain subdued, then asset monetisation and execution remain key catalysts for L&T.
Overall, the March quarter results show no broad-based recovery in order inflows for capital goods companies. Firms with exposure to government investments in power transmission, railways and infrastructure sectors are seeing increased order inflows. Others continue to struggle, with muted private sector investment trends.