Orders drying up for power equipment companies

Declining revenue visibility of power equipment manufacturers is worrying investors. With new orders hard to come by, the order books of these companies have been shrinking progressively, putting a question mark on margins and profitability in the quarters to come.

At the end of March this year, the order backlogs of many companies, including Thermax, Triveni Turbines, Crompton Greaves, Voltas, TD Powers and Bluestar, stood below their sales for the last fiscal. In other words, their book-to-bill ratios, or orders pending at the end of the year vis-a-vis revenues booked during the year, are below 1.

Take Thermax, for example. “There’s a paucity of new orders, which indicates at least 10-15% revenue degrowth for the company this fiscal,” said an analyst with a domestic brokerage.
The analyst pointed out that historically, Thermax has billed revenues equivalent to 80-90% of its order book. The company had orders worth Rs6,446 crore at the end of March 2011 and logged revenues of Rs5,304 crore for the year ended March 2012. By that yardstick, with orders of Rs4,828 crore at the end of March 2012, the company should have revenues of Rs4,500 crore or so during the current fiscal, he reasoned.

The analyst said 100% order execution in the boiler turbine generator (BTG) business was rare as it involved a long product manufacturing cycle.

The poor revenue visibility, in turn, is seen impacting the companies’ margins and profitability. “Since there are few orders in the market, most of the BTG players or other power equipment manufacturing companies are quoting aggressively,” said John Perrinchery, senior analyst, Asian Market Securities.
Rabindra Nath Nayak and Nirav Vasa, analysts with SBI Cap Securities, appear to concur. The capital goods sector saw orders worth `12,150 crore finalised during September, down 60% year on year and 33% on month, they said in a note.

“This means the profitability of these companies may come under pressure in FY13,” said Perrinchery. Since BTG is a highly capital-intensive operation, the valuation of these companies will be decided by how these companies are placed on the working capital front and whether their profits are sufficient enough to cover the interest outgo, he said.

New entrants in BTG segment, such as BGR, are more prone to margin erosion, said another domestic brokerage analyst. “BGR has a strong order book, but most of the projects will be executed in 2014-15 and hence, substantial revenue recognition will not happen this fiscal. However, high working capital requirement and interest outgo may impact the profitability of the company this fiscal,” he said.

The analyst pointed out that many capital goods companies show lower order backlog than their annual sales. But since they are mostly into manufacturing products with shorter cycles, they can replenish their order books quicker. Unlike them, the product cycles for BTG manufacturers are fairly long.

“The BSE Capital Goods Index has witnessed a rally of 17% in last one month. However, we believe the rally is supported more by positive sentiment post the increased pace of decision-making by the government rather than fundamentals... major industry-wide re-ratings triggers like large order finalisation and fresh inflow of large orders coming for bidding process are missing,” said the SBI Cap Securities report.