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Photo: iStock
Photo: iStock

Working capital outlook for cap goods firms still cautious

With the govt’s focus shifting from healthcare to economic revival, public sector orders are improving

For capital goods and engineering companies, a key concern during the first half of this fiscal year was labour shortage. Execution of ongoing projects had taken a severe hit due to supply-side issues, weighing on overall earnings performance. Recent channel checks by brokerages show that labour availability at project sites has largely bounced back to pre-covid levels in the December quarter. So, execution is expected to improve on a sequential basis, aiding revenue growth.

“After a dip in execution of 35% year-on-year in Q1FY21 and 13% y-o-y in Q2FY21, we expect 7% y-o-y growth in Q3FY21 on the back of a pickup in execution for both product and EPC companies. Stabilization in supply chain, labour normalization and government focus on liquidity are the key driving factors," analysts at Edelweiss Securities Ltd said in a report on 4 January.

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EPC is short for engineering, procurement and construction.

That said, given the obligations to follow safety norms at project sites, the pace of recovery in execution is likely to be moderate at best, said analysts. This means even though revenue growth would improve, the commentary on working capital management is likely to remain cautious.

“Overall, EPC companies like L&T, KEC, KPTL, BEL and Cochin Shipyard are expected to remain cautious on working capital and cash flow challenges amid increasing receivables, vendor support amid tight liquidity and moderate execution pace," analysts at ICICI Securities Ltd said in a report on 8 January. Investors would remember that most companies in this sector were grappling with working capital issues in the first half of the fiscal year mainly due to delayed client payments.

Apart from that, a headwind in the form of commodity price inflation is emerging for the sector. Analysts said investors would want to know the ability of companies to pass on the same to clients in the current environment.

As for order inflows, with the government’s focus slowly shifting from healthcare to economic revival, orders from the public sector are improving. That said, muted private sector capital expenditure remains a pain point for the sector.

Analysts at Edelweiss expect more than a 50% y-o-y jump in order inflow in Q3FY21 with large order finalizations by the government.

“Orders in core infrastructure verticals, such as water, power T&D (transmission and distribution), railways, and metros have sustained, while large order finalization pertaining to high-speed rail adds to a value growth in Q3 for the sector," added the Edelweiss report.

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