Graphic: Santosh Sharma/Mint
Graphic: Santosh Sharma/Mint

Capital goods firms see no respite from weak orders, tight liquidity

  • The only silver lining in a gloomy quarter is that corporate tax cuts will shore up profits of capital goods firms
  • Analysts estimate a 6-8% year-on-year drop in order flows for capital goods firms in Q2

The September quarter performance of capital goods firms is likely to show them in worse light than the June quarter. Barring Larsen and Toubro Ltd (L&T), a diversified conglomerate, weak order flows and commentary on elongated working capital cycle will mar positives such as cost-control and stable margins.

Cues for weak order flows were visible in Centre for Monitoring Indian Economy’s Q2 FY20 data that shows a 50% year-on-year drop in new projects. A broad-based slowdown across sectors led by a fall in consumption and the liquidity crisis, along with around 75% utilization of existing manufacturing capacity is lead indicators of weak capital expenditure.

Analysts estimate a 6-8% year-on-year drop in order flows for capital goods firms in Q2. Unfortunately, the Street pinned hopes, in vain on recovery in government spending after the elections. Few orders may trickle in either from state governments or short-cycle orders from the private sector.

Edelweiss Securities Ltd estimates “order inflow to decline 10% yoy in the light of the lack of orders announced by Engineers India, KEC International, etc. MNCs like Siemens, ABB and L&T, Kalpataru will have some growth in new orders amongst peers". The global slowdown will drag down order flows for firms such as Cummins India Ltd that have significant exports.

Meanwhile, the domestic liquidity crisis has put lenders on the back foot, impacting corporate finances. A report by PhillipCapital India Pvt. Ltd says, “Companies skewed towards government orders should see increase in working capital intensity, which would be impacted by lower advances and higher receivables." Whether recent measures taken by the government to expedite payments due to its vendors will improve the situation remains to be seen.

However, investors have turned more pessimistic. The BSE Capital goods index that spurted on news of several government measures taken to revive capex reversed on weak outlook. The only silver lining in a gloomy Q2 is that corporate tax cuts will shore up profits. That apart, margins are likely to be stable on the back of cost-cutting.

Despite easing valuations, shares of capital goods firms are likely to wobble along until there is a sustained increase in order flows.

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