BackCapital goods firms eye more orders from domestic market
Firms bet on the govt's effort to revive stalled projects, build smart cities and raise spending on infrastructure
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Mumbai: Having weathered the domestic economic downturn by relying on overseas orders, Indian capital goods companies, including Larsen and Toubro Ltd (L&T), are expecting a rebound in local demand this year to boost profits and drive margin expansion.
Recent measures announced by the National Democratic Alliance (NDA) government to revive stalled projects, build smart cities and increase spending on infrastructure, especially roads and highways, are expected to boost orders for capital goods companies.
“Currently, the order inflow pattern indicates slow domestic order growth; however, going forward, the composition of international and domestic orders may tilt with more domestic orders compared to foreign ones," L&T’s chief financial officer R. Shankar Raman said. “By the end of the (fiscal) year, we may see 75% of the order inflows from the domestic sector and remaining from international," Raman said on 28 July, when the company announced its June quarter earnings.
For the quarter ended 30 June, 44% of the order inflows came from the international projects for L&T, India’s biggest engineering and construction company.
In recent months, L&T, and companies like Thermax Ltd and ABB India Ltd, have been looking to markets such as Africa and the Middle East to generate higher revenue overseas as India’s economic growth slumped below 5% for two consecutive years and delayed government approvals stalled many capital-intensive projects.
In India, sectors like water, urban transportation and power transmission are hot sectors now, said Raman. Even if big ticket-projects and industrial capital expenditure are not picking up right away, there exists a collage of sectors where prospects are bright.
L&T is also expecting investments from the government in industrial corridors and sees potential opportunities in revamping smaller airports; Sectors like health, leisure and education are expected to benefit from increased investment.
A rise in domestic orders will bode well for the margins of capital goods companies. Winning international orders entails intense competition with Korean and Chinese entities, keeping margins extremely tight margins. Indian companies have been sacrificing margins in a bid to win overseas projects, specially in markets like the Middle East.
“As stuck projects start moving, and new domestic orders pour in, margins will be better," said Amit Anwani, an analyst at KC Securities Pvt. Ltd.
“When Larsen & Toubro was focusing on overseas markets—Middle East—they were compromising on margins because costs associated to do an overseas project such as labour costs, international standards and technology are different compared to the domestic market," he said.
If domestic orders increase and export composition comes down, the margin mix will be better and higher for the 2014-15 and 2015-16 fiscal years for the capital goods companies that have a presence in overseas markets, Anwani said.
The Narendra Modi-led government, in its annual budget, proposed a ₹ 10,000 crore boost for road projects and long-term financing options for infrastructure projects. These initiatives will lead to a revival of some of the stalled projects, increasing business opportunities for the sector.
Other companies like ABB India, which mostly operates in the power equipment space, are bullish about the impact of the government’s recent thrust on power infrastructure.
“Recent initiatives point to the fact that the demand drivers remain intact and the pace of growth for the Indian economy has moved to a faster track. which is quite encouraging and we expect that the domestic market will pick up," said N.Venu, division manager, power systems, ABB India.
New phases of projects like the Jawaharlal Nehru National Solar Mission, and many states announcing solar projects will also provide opportunities for the company, Venu added.
According to a report by Religare Capital Markets, the Cummins India Ltd management believes business has bottomed out and the outlook for domestic and export sales has improved. Cummins has also raised its revenue growth guidance, for the 2015 fiscal to 10-15%.
To be sure, companies would not go slow on securing international orders, even as the domestic market prospects brighten.
And hopes of a turnaround in the domestic market haven’t become manifest yet. Narayan Barasia, chief financial officer at Greaves Cotton Ltd, said he expects an improvement in domestic orders to take place only in the next 2-3 quarters.
“There will be a trickle of domestic orders towards the end of the year, but we will only see a credible improvement from the first quarter of the next fiscal," said M.S. Unnikrishnan, managing director and chief executive officer at Thermax.
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