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With expectations of recovery in the private capex cycle further delayed, the sector remains dependent on the government for orders. (Photo: Mint)
With expectations of recovery in the private capex cycle further delayed, the sector remains dependent on the government for orders. (Photo: Mint)

Capital Goods: Amid muted order inflows, investors can seek solace in improving execution

Most of the project sites are back to 85-90% of pre-covid levels in terms of activity, analysts said

Investors in capital goods stocks were mainly worried about two things following the dismal June quarter earnings. One is that acute labour shortage at project sites had severely hampered execution. The other is that the order book growth for key companies was flat, mainly because of the government’s focus on healthcare spending.

Labour supply has improved with the easing of restrictions across states. Most of the project sites are back to 85-90% of pre-covid levels in terms of activity, according to analysts. This means that the decline in revenue would be contained to some extent. That said, social distancing and quarantine norms would hinder a complete recovery in the near-term.

However, there isn’t much to look forward to in terms of order inflows. The lull in private capital expenditure would continue. Capacity utilization across sectors declined to nearly 60%, impacted by the pandemic in the June quarter. With expectations of recovery in the private capex cycle further delayed, the sector remains dependent on the government for orders. The measures announced in the latest stimulus are unlikely to boost capex in a meaningful way, said analysts.

Edelweiss Securities expects overall order inflow to decline 40% year-on-year in the September quarter. “New orders, in our view, are still lagging as most clients (including PSUs) are focusing on completing projects at hand," it said in a 6 October report

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