Fall in order inflows shows more pain ahead for industrial stocks such as L&T, BHEL, Thermax

The stretched valuations of industrial stocks such as L&T, BHEL, Thermax, Crompton Greaves and Voltas are likely to move closer to reality amid shrinking order books in the second quarter of 2015-16. The cumulative domestic order inflows of seven large industrial companies fell 49% to Rs 23,500 crore in the September quarter. For BHEL and L&T, the decline has been 81 per cent and 46 per cent, respectively.

Chances are the pain could continue. Many industrial companies have trimmed their order inflow expectations for FY16. L&T, India’s largest infrastructure company, has pared its order inflows growth guidance to 5-7 per cent for FY16 as against 15 per cent earlier. Similarly, Thermax, a manufacturer of boilers, said there were no green shoots and a recovery would take at least a few quarters. These put question marks on the expected recovery in the investment cycle.

Typically, valuation of stocks of industrial players are influenced by three factors: Order inflow growth, revenue growth, and margins. Till September end, order books appeared promising (while revenues were and margins were not). This pushed shares of BHEL and L&T down 32 per cent and 25 per cent in the past three months. Investors are reluctant to pay premium for industrial stocks. ABB is trading at 52 times its next year’s projected earnings, BHEL at 19 times, Crompton Greaves at 25 times, and L&T at 21 times. Indeed, most industrial stocks are trading above their historical averages.

Order inflows could stay weak for two reasons: One, subdued investment activity in general; Second, slow project execution due to poor financials of companies or hurdles like land acquisition, fuel shortage and resource non-availability.