Capital goods companies may post weak numbers owing to dull Q4

MUMBAI: Capital goods companies are likely to close the fiscal 2015-16 on a weak note as order flow in the fourth quarter, typically their strongest, has been muted. While sector leaders power equipment maker Bharat Heavy Electricals and Engineering and construction major Larsen & Toubro have clinched some orders in the March quarter so far, analysts say the orders in the sector are far too few and big orders continue to be elusive.

“Public sector has awarded some orders but the ordering momentum has decelerated on the whole. While BHEL has bagged some orders, most other companies have seen poor order inflows,” said Sanjeev Zarbade, vice president - private client group research, Kotak Securities.

Capital goods companies continue to bear the brunt of slowdown in manufacturing and infrastructure sectors. Order inflow and sales in the final quarter of the year may remain muted while companies may be able to show some improvement in profit margins on the back of softer raw material prices and cost saving measures, analysts said.

The Union Budget 2016-17 has committed total spend of Rs 2.2 trillion on the infrastructure sector, reiterating the government’s focus on the sector. This offers a strong pipeline for capital goods companies going ahead, but there are no signs of recovery in investment from the private sector as most companies struggle with stretched balance sheets.

“Our bottom-up capex analysis indicates a 13% decline in corporate capex in both FY17 and FY18. Consequently, we see challenges to an investment-cycle recovery and hence project execution in FY17 — this in turn will dampen profitability, inviting downside risks to earnings,” Religare Institutional Research said in a report last week.

The brokerage recommended short-cycle product companies over long-cycle project companies to investors. “Our top ideas with a one-year horizon are ‘sell’ L&T and BHEL and ‘buy’ KKC. Analysts see dismal capex from private sector oil and gas companies, given the low crude oil prices. Power and metal companies are also unlikely to start investing anytime soon. The PSU orders may help the capital goods companies keep their order book ticking.

“We believe consensus earnings estimates in the capital goods sector are on the higher side. Downside risks are likely to emanate from slower project execution on account of higher cost of capital as well as rising cost of debt. On an average, we are 22%, 14% below consensus on FY17, FY18 earnings, respectively,” said Religare.