BackCapital goods: product firms’ performance improves on exports
Growth after six-eight quarters as exports rise; some credit goes to currency and base effect
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Capital goods firms making engineering products like ABB India Ltd, Cummins India Ltd, Voltas Ltd and Siemens Ltd are seeing a gradual improvement in revenue and profitability although state-run Bharat Heavy Electricals Ltd (Bhel) is struggling.
The trump card for the smaller firms is their presence in short-cycle orders with a greater emphasis on products and reasonable contribution from exports.
In addition to the Middle East, which was a strong export zone for Indian engineering products, new regions like Africa, South-East Asia and Latin America are panning out well for Indian exports.
An analysis of 38 firms in the power and industrial products sector showed growth in the December quarter revenue against the year-ago period, according to a Motilal Oswal Financial Services Ltd report. This is good news, particularly as the growth comes after a gap of six-eight quarters. Much of this is on account of exports while some credit goes to currency and base effect factors.
Within the capital goods industry, export opportunities have sprung up for switchgears, boilers, turbines, industrial machinery and diesel generator sets where Indian firms are very competitive.
The trend is also mirrored in data at the Centre for Monitoring Indian Economy—while exports from India have increased, imports have fallen, helping narrow the trade deficit. Exports are inching up on the heels of a gradual recovery in the global investment cycle. Global firms like Cummins and Siemens in recent investor conference calls have indicated optimism, especially about European markets.
However, the domestic capex cycle remains bleak with worsening liquidity and capacity utilization. Construction, mining, real estate, power, oil and gas and roads remain weak. Hence, big firms like Bhel, which have a high proportion of long-gestation projects, are in a quagmire on account of project delays, policy logjam and poor demand.
The difference in performance is also visible in the financials. While Bhel’s profitability has been sliding for several quarters, that of Voltas, ABB, Cummins and Siemens is showing stability. On the whole, however, the S&P BSE Capital Goods index has rallied since September on the hope the sector has hit the abyss and a recovery is in the offing.
That said, it will take several quarters for the whole sector to hit positive all-round growth momentum, which will depend on domestic economic recovery. However, the smaller firms mentioned above may get re-rated in the markets faster than the whole sector.
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