Capital goods companies continue to be under pressure on the demand front. Just when it seemed that there would be a revival in the investment cycle both domestically and in overseas markets, plummeting crude oil prices have posed new concerns for these firms.

With crude oil prices falling by half in the past six months, large capital goods firms, which had diversified into middle eastern markets, could find themselves in a quandary. This can jeopardize orders from the Middle East and North African (MENA) region. A Prabhudas Lilladher Pvt. Ltd report says the finalization of new orders in the MENA region has slackened in the last six months. Apart from a slow approval process, collection of receivables is also a big problem in the Gulf region.

Companies such as Voltas Ltd, Punj Lloyd Ltd and Larsen and Toubro Ltd (L&T) have a significantly high exposure to this region, having ventured there to diversify geographic risk.

Besides, balance sheets continue to be highly leveraged in spite of efforts by some companies to sell off assets and cut debt. A recent report by Kotak Securities Ltd says payment cycles, particularly in the power segment, have worsened, owing to delayed payments by power distributors. Most brokers expect flattish revenue growth and a drop in operating profit in the December quarter.

This is the reason why the S&P BSE Capital Goods index has given up some of its gains made during May-July. Back then, these stocks were in high demand, thanks to expectations from the new government. Besides, it had seemed that the Indian economy was on the cusp of a recovery.

Having said all this, the silver lining is that domestic macro-economic data for the last couple of months from the Centre for Monitoring Indian Economy (CMIE) and the HSBC Purchasing Managers’ Index is improving. It shows a slow pick-up in investment activity. Fresh orders are visible in the infrastructure segment, mainly roads. December CMIE data shows a 177% increase year-on-year in investment in infrastructure and industry. But given the above-mentioned concerns, investors are understandably treading cautiously.

The writer doesn’t own shares in the above-mentioned companies.

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