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Engineering: A year full of challenges

Jun 11, 2009

India's engineering and capital goods companies have dealt with various obstacles over the past year four quarters of FY09. In the early part of the year, concerns regarding rising commodity prices hit companies' directly and indirectly. Directly, as their margins were impacted (higher input costs). Indirectly, as their clients lowered or delayed their investments on account of rising input costs. During the July to September 2008 period, companies had to deal with high interest rates and the bizarre forex fluctuations. During the December quarter, a majority of them saw sharp contraction in operating margins on account of higher input costs. In addition to this, the order inflows also slowed down on account of tightening of liquidity. This was the case in the latest quarter (4QFY09) as well. In order to gauge the financial performance of these companies, we present herewith a combined FY09 performance of nine of them and our analysis of the results.

Performance* of capital goods companies
(Rs m) FY08 FY09 Change%
Sales 744,899 989,936 32.9%
Expenditure 648,992 879,609 35.5%
Operating profit (EBDITA) 95,907 110,327 15.0%
Operating profit margin (%) 12.9% 11.1%  
Other income 24,306 27,057 11.3%
Depreciation 12,582 15,636 24.3%
Interest 4,492 7,883 75.5%
Profit before tax (PBT) 103,140 113,864 10.4%
PBT margin (%) 13.8% 11.5%  
Extraordinary income/ (expense) 1,605 8,035 400.7%
Tax 35,271 40,499 14.8%
Profit after tax/(loss) 69,473 81,400 17.2%
Net profit margin (%) 9.3% 8.2%  
* Consolidated results for BHEL, Blue Star, Crompton Greaves,
LMW, L&T, Praj Industries, Punj Lloyd, Thermax and Voltas

The revenue growth of this lot stood at a robust 33% YoY during FY09. Considering that the capital goods sector companies had built up a huge orderbook last, such growth was not unexpected. However, as compared to the revenues, expenses increased at a faster rate of 36 % YoY during the fiscal. As such, this led to a slower operating profit growth of 15% YoY.

Out of the nine companies, six saw their operating margins decline during the year. On a consolidated basis, the group's operating margins contracted by 1.8% YoY during the year. Reasons behind the same were various - higher input costs, higher other expenditure, higher employee costs, and higher subcontracting charges (all as percentage of sales).

As compared to the growth of 15% YoY in operating profits, the increase in profit before tax was lower (10% YoY) mainly due to higher interest costs (as a percentage of sales). Interest costs increased to nearly 0.8% of sales as compared to 0.6% during FY08. In absolute terms, the rise was 76% YoY. Depreciation charges also witnessed an increase of about 24% YoY. However, on comparing them to the sales, there was a marginal dip (1.6% in FY09 as compared to 1.7% ion FY08).

The 17% YoY increase in net profits was mainly on account higher other extraordinary income. Engineering and construction major, L&T contributed to a major portion of the extraordinary items as it sold its ready mix concrete business during the year. However, on excluding the extraordinary items (the total amount), the growth in profits stood at 8% YoY. The group witnessed a higher tax outgo during the year as well

Source: CMIE
Conclusion
The period from October 2008 to February 2009 was a difficult one for these companies, as they were facing problems due to liquidity crunch faced by clients (increasing debtor days), deferment of projects, and inventory buildups, amongst others. However, the scenario has taken a turn for the better in recent times. Managements of companies that are catering to core infrastructure sectors have a general sense of optimism for the future, especially given that they expect stability in governance and reforms over the next 5 years.

However, companies that are present in niche segments have put in a word of caution for the next few quarters. It may be noted that the BSE-Capital Goods Index has risen by nearly 150% over the past three months as compared to BSE-Sensex's rise of around 90%.


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