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For three years, the BSE Capital Goods index has underperformed Sensex on weak order flows and lack of traction in the private sector.
For three years, the BSE Capital Goods index has underperformed Sensex on weak order flows and lack of traction in the private sector.

Weak order inflows underscore pessimism over capex recovery

  • Fresh investments in the December quarter contracted by 26.4% year-on-year, shows CMIE data
  • Projects under implementation rose by 4.5%, even as those abandoned/shelved/stalled rose nearly three times

The weak capital expenditure (capex) cycle continues to be a worry, as was highlighted in the central bank’s recent monetary policy. There is some traction in small-ticket industrial orders, but hardly any large project announcements in the private sector.

The December quarter results of leading capital goods companies reinforced these concerns. Order flows were lacklustre. Companies with large domestic operations reported low single-digit growth in order flows.

“Order booking at the consolidated level was marginally up at 1,480 crore ( 1,413 crore year ago), due to ongoing sluggishness in new investments in several sectors…," Thermax Ltd’s results release said.

Indian arms of multinational companies such as Siemens Ltd reported an increase in only small orders below 100 crore. Overall order inflows barely inched up 4%. The firm’s order book now covers just a year’s revenue.

Power transmission and distribution solutions provider KEC International Ltd also said that the pace of new orders had slowed down.

Data from the Centre for Monitoring Indian Economy Pvt. Ltd (CMIE) also paints a gloomy picture. Fresh investments in the December quarter contracted by 26.4% year-on-year. Projects under implementation rose by a meagre 4.5%, even as those abandoned/shelved/stalled rose nearly three times compared to the year-ago period. Within this, fresh private sector investments too were down by nearly 11%.

In the private sector, orders are in digital automation, process improvement, and consumption driven sectors such as auto, food processing, beverages, sugar, chemicals and waste heat recovery. There are hardly any project orders driven by capex in sectors such as cement, steel, power, and oil and gas.

“The slow pace of earnings growth and weak return ratios across most industries are bound to keep capex in the private sector subdued," said Dhananjay Sinha, head (institutional research) at Emkay Global Financial Services Ltd.

Even the pace of public sector capex may slow down, given the forthcoming elections and the large outlay to boost consumption demand.

The government’s outlay for investment spend was lowered as a proportion of gross domestic product (GDP) in the interim budget.

“Therefore, the impetus to the capital goods sector from higher public spending can wear off, even as private capex remains modest," added Sinha.

The only factor that could trigger some positive investor sentiment is strong execution on the back of existing orders. This, along with efforts to focus on new areas and short-cycle orders, and cost-cutting measures, has helped sustain profitability amid the gloom.

This trend is likely to continue for some more quarters, until there is greater optimism in the private sector to drive capex.

Investors, however, seem to prefer to stay on the sidelines. In the past year, the BSE Capital Goods index has fallen 14.97% compared to a 5.21% decline in the Nifty 500 index.

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