Capital Goods: Rebound to strengthen topline growth

Capital Goods: Rebound to strengthen topline growth (updated - 22 June 2010)
The capital goods sector has seen a rebound for the quarter ended March 2010, with sales growth climbing to 15%, according to the financials of more than 200 companies in the sector. This is in sharp contrast to the sector’s performance in the previous three quarters when the growth rate averaged less than 3%.

Despite input price pressures, the sector could maintain its profitability aided by lower fixed costs. The outlook for the sector remains strong in terms of topline growth, with greater parts of the economy witnessing improving momentum. Impressive IIP numbers for April 2010, when the capital goods index rose by more than 70%, also strengthens the optimism. However, there could be continued pressure on input costs which may restrict the growth in the bottomline.

It is interesting to note that while the sales grew marginally in the previous three quarters, profit growth was impressive at more than 20%. This is because of a sharp drop in commodity prices, providing companies almost 5 percentage-point improvement in profit margins.

The performance has reversed in the fourth quarter with a lower profit growth of 14%, despite strong sales growth, with commodity prices again shooting up in Q4 2010. Profit growth was also affected by an increase in employee cost, depreciation and other expenditure, all of which rose in the range of 12-14%.

Both the industry leaders, L&T and BHEL, had an impressive performance with nearly 30% sales growth and more than 40% growth in profits. While BHEL has maintained its performance, L&T’s profit growth has revived after three quarter of stagnating sales. However, other than these two, many of the top companies recorded a dismal performance, with ABB being the worst as its profit fell to less than one-tenth of previous year.

ABB, along with Siemens, which recorded a 20% decline in profits, has faced considerable increase in all cost items, aggravated further by stagnating or decline in sales. Suzlon Energy, which has been going through a bad patch for the past six quarters, recorded another dismal performance with a consolidated loss of Rs 176 crore.

Even though the top guns are showing mixed results, the outlook for the sector looks quite upbeat now after an uncertain year. Many of the major companies had faced delays in their projects execution, despite having considerable order books.

With the economy gaining momentum, it should be possible to improve the pace of execution. The top 10 companies in the sector have reported better topline growth than the aggregate, unlike in the previous two quarters. Many of the smaller engineering companies are dependent on the larger ones for sub-contracting and related work. A faster growth for the larger ones signals better order inflow for the smaller ones also.

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