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Capital goods: December quarter review - Views on News from Equitymaster
 
 
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  • Feb 12, 2009

    Capital goods: December quarter review

    The third quarter of FY09 did not bring about any stark difference in the performance of Indian engineering companies when compared to their performance in the previous quarter (2QFY09). In 3QFY09, while revenue growth remained good, profits were under pressure for most of the companies.

    We have consolidated and compared the quarterly results of twelve such companies. Net sales for this consolidated group increased by 20% YoY during 3QFY09. This is low compared to the 30% YoY growth that these companies had shown in 2QFY09.



    Performance* of capital goods companies
    (Rs m) Oct-Dec 2007 Oct-Dec 2008 Change%
    Sales 215,344 258,406 20.0%
    Expenditure 187,051 234,157 25.2%
    Operating profit (EBDITA) 28,293 24,248 -14.3%
    Operating profit margin (%) 13.1% 9.4%
    Other income 5,632 10,205 81.2%
    Depreciation 2,933 3,310 12.8%
    Interest 1,266 2,959 133.8%
    Profit before tax (PBT) 29,726 28,184 -5.2%
    PBT margin (%) 13.8% 10.9%
    Extraordinary income/ (expense) 1,662 4,781 187.7%
    Tax 9,130 9,201 0.8%
    Profit after tax/(loss) 22,258 23,765 6.8%
    Net profit margin (%) 10.3% 9.2% -1.1%
    * Consolidated results for BHEL, Blue Star, Crompton Greaves, LMW, L&T,
    Praj Industries, Punj Lloyd, Siemens, Suzlon, TRF, Thermax and Voltas

    As compared to the revenues, expenses increased at a faster rate of 25 % YoY. This led to a 14.3% YoY drop in operating profits. From the above group of twelve companies, nine companies witnessed contraction in operating margins. On the whole, the group's operating margins contracted by 3.7% YoY during the quarter. This was on account of higher input costs and contractor charges (as a percentage of sales). However, the managements of most of these companies believe that they will benefit from lower raw material prices next quarter onwards.

    As compared to the operating profits, profit before tax dropped by just 5% YoY during the quarter. This is attributable to higher other income earned by selected companies. However, what clearly stands out is the spike in the interest costs, which increased by 134% YoY during the quarter. This was largely due to a sharp spike (of 206% YoY) in interest costs of Suzlon. As a percentage of sales, interest costs increased to 1.1% in 3QFY09 as compared to 0.6% in 3QFY08. On the other hand, depreciation expenses marginally dropped to 1.3% (as a percentage of sales).

    The combined bottomline is higher by almost 7% YoY. However, this increase is largely on account of a large extraordinary income reported by L&T during the quarter on account of sale of its ready mix concrete business. If we exclude the extraordinary items from both the comparable quarters, the net profits for 3QFY09 have declined by almost 8% YoY. As compared to the profit before tax, the net profits declined further on account of higher tax outgo. The effective tax charges increased to 32.6% in 3QFY09 as compared to 30.7% in 3QFY08.

    Conclusion

    The managements of most of these companies have stated that new order enquiries continue to remain strong. However, what is taking time is the finalization of projects by clients. In addition, the inventory and debtor days for some companies have increased substantially on account of lower demand and delayed payments due to cash crunch faced by clients.

    On account of their healthy order books, some of these companies have not been facing troubles in increasing their revenues. However, it is the near future they we are concerned about. The sector as a whole is going through a tough time when it comes to getting new orders. And this especially holds true for smaller players. While companies have built up their order books in the last few years, the fact that they are executing orders at a quicker pace will narrow the gap between the backlog and revenues. While the managements of a few companies indicated that order inflow is not an issue, some mentioned that they have extended their execution cycle for the above-mentioned reason. In addition, they also stated that there is a considerable amount of increase in project execution on their clients' requests as well.

     

     

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