L&T underscores cap goods hellhole

The capital goods sector, which boasts corporate majors such as Bhel and L&T, is bearing the brunt of slowdown in the capital expenditure (capex) cycle. This L&T’s fiscal 2012 results, announced on Monday, have confirmed.

New orders at L&T declined 12% to Rs70,574 crore, lower than the forecast Rs83,000 crore. The corresponding decline in the last quarter is 30%. R Shankar Raman, CFO of L&T, said, “Decelerating growth momentum across the sectors during 2011-12 led to deferment of capital expenditure and fresh investment decisions which led to decline in order inflows for FY12.”   

Most of the capital goods companies manufacture power sector equipment and hence are order book-dependent. New orders for Siemens, Thermax and Voltas have declined on-year, indicating delays in capacity addition in the power sector. The yawning gap between new orders and guidance given by major companies indicates tough times ahead.

Although L&T reported a healthy 21% revenue growth and 13% net profit growth and offered guidance of 15-20% growth in order intake and revenue for fiscal 2013, analysts are a bit sceptical.

“It’s very difficult to get orders in this kind of macroeconomic scenario. At the beginning of the last fiscal, L&T gave a guidance of 15% increase in order inflow. This figure was revised to 5% during the second quarter of last fiscal. Today, we all know that L&T, in fact, registered a decline of 12%. So, very optimistic guidance is one thing and achieving that figure quite another,” said an analyst.

But Raman disagreed, saying a large order book and diversified business verticals, mean L&T can sustain revenue growth momentum in the medium term.

L&T, he said, is focusing on overseas markets, especially the Middle East, which will likely offset the deficit in order inflow in India.

Nitin Arora, senior analyst, Angel Broking, said that investments across various sectors have substantially decelerated due to the deteriorating macroeconomic environment. But, with numerous headwinds troubling the power sector, the boiler-turbine-generator (BTG) space has come to a virtual standstill. This could be discerned from absence of new orders and erosion of margins of capital goods companies in last fiscal.

New orders have also declined sharply at Bhel, from Rs60,507 crore in 2010-11 to Rs22,096 crore last fiscal (as per provisional data).

“This is a 64% decline in order intake in just one year. Such a massive decline will negatively impact revenues in FY14,” said Rabindranath Naik, lead analyst at SBI Cap Securities.

As a similar tale unfolded at Thermax, Voltas, Siemens and elsewhere, companies blamed a combination of factors: coal linkage, land and environment clearances, high interest rates, tighter liquidity, capex delays at many power companies, delays in capacity addition in the power sector, excess capacity and weak replacement demand in industries like steel, cement, oil and gas, and lower investment in the infrastructure sector.

Overall, the Street is unanimous that 2011-12 was one of the worst years for capital goods companies, in terms of low order inflow and erosion of margins.