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Engineering: Looking at strong FY04 - Views on News from Equitymaster
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  • Apr 7, 2003

    Engineering: Looking at strong FY04

    While most sectors finished FY03 on a glum note, Engineering companies had a whale of a time. Almost all engineering companies finished FY03 with gains in performance and consequently, in stock price.

    (Share price Rs) 28-Mar-02 31-Mar-03 % Change
    BSE Sensex 3,469 3,049 -12.1%
    S&P CNX Nifty 1,130 976 -13.6%
    Atlas Copco 114 277 142.3%
    Thermax Ltd. 78 138 76.9%
    Tata Honeywell 147 238 62.8%
    Bharat Electronics 127 181 42.3%
    Ingersoll Rand 143 195 36.8%
    Bhel 169 224 32.4%
    ABB 266 294 10.9%
    Crompton Greaves 46 51 10.9%
    Siemens 255 281 10.0%
    L&T 181 185 2.1%
    Esab India 29 41 -29.4%
    Cummins India 52 53 -1.5%

    The table above reflects the overall positive sentiment towards engineering companies in FY03. This came about through a mix of higher orderflows, government's thrust towards power reforms and productivity gains. A look at the order inflow of the top engineering companies puts forth the the reason for the strength in market capitalisation. Both ABB and Bhel reported record order inflow growth (see table below).

    Order flow…
    Rs bn Order inflow
    in FY03
    backlog as a
    % FY03 turnover
    ABB 13.1 8.8 73.2%
    Bhel 112.5 158.0 140.5%
    Thermax* - 1.9 34.5%
    * nine month period ended December'02

    Consequently, most companies finished FY03 with encouraging topline and bottomline performances. We have illustrated the performance of Bhel, ABB and Thermax to highlight this point. All the aforesaid companies have put themselves neck deep in restructuring when the times were not so good. While Bhel reduced its employee base by nearly 23% to 48,000 in the last 4 years, Thermax too, has rationalised its employees by over 16% in recent times. Though we did not include Siemens in this sample, it is worthwhile to note that even this company rationalised its employee size by 7% in the last one year. These measures too gave a further fillip to the companies bottomline.

    (Rs m) FY02 FY03 % change
    Revenues 10,558 12,006 13.7%
    Order inflow 10,920 13,050 19.5%
    PAT 653 972 48.9%
    Net profit margin (%) 6.2% 8.1%  
    (Rs m) FY02 FY03 % change
    Revenues 72,870 75,100 3.1%
    Order inflow 98,550 112,480 14.1%
    PAT 4,680 5,110 9.2%
    Net profit margin (%) 6.4% 6.8%  

    Apart from employee rationalisation, these companies have also been taking a hard look at their product folio’s and aligned them to fit consumer needs. While ABB signed up with the parent as a potential global sourcing base for equipment manufacturing, BHEL started to outsource small manufacturing needs to spend more time on research and development of high end products. Thermax restructured its entire management team filling its board with independent directors thus improving management credibility.

    (Rs m) 9mFY02 9mFY03 % change
    Revenues 2,805 3,594 28.1%
    Order backlog 2,510 1,900 -24.3%
    PAT 63 144 129.1%
    Net profit margin (%) 2.2% 4.0%  

    With the government continuing its focus on power sector reforms, the sector has much to look forward to in the coming years. The focus on building and enhancing our network of roads, ports, airports and railways will also be a boost for the engineering companies in the coming years. The companies burgeoning order backlog indicates a strong FY04 awaiting the sector.



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