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Capital goods: June quarter review

Aug 12, 2008

Rising commodity prices and continuous news flows of a worldwide economic slowdown had brought a sense of caution and pessimism amongst investors in the past few months. As such, the capital goods sector, being highly dependent on the investment cycle, was at the receiving end. The BSE-Capital Goods Index is in fact one of the worst hit sectoral indices in the year till date. However, strong quarterly results by leading companies from the sector have helped in curbing the negative sentiments to a certain extent. We have consolidated and compared the June quarter results of thirteen capital goods sector companies. Fortunately, for these companies, it's the strong order backlog that has helped them sustain strong growth during the quarter. The topline for this consolidated group has increased by a respectable 38% YoY. We believe that this same element will be the growth driver for this sector going forward as there is a handful of companies whose order backlog exceeds their FY08 revenues in excess of two to three times.

Performance* of capital goods companies
(Rs m) Apr-Jun 2007 Apr-Jun 2008 Change%
Sales 176,136 242,751 37.8%
Expenditure 160,229 217,076 35.5%
Operating profit (EBDITA) 15,907 25,675 61.4%
Operating profit margin (%) 9.0% 10.6%
Other income 5,898 7,134 21.0%
Depreciation 2,879 3,797 31.9%
Interest 1,637 2,221 35.7%
Profit before tax (PBT) 17,289 26,791 55.0%
PBT margin (%) 9.8% 11.0%
Extraordinary income/(expense) 303 (1,341)
Tax 5,666 8,701 53.6%
Minority interest (15) (406)
Share of profit & loss of associates 11 25
Profit after tax/(loss) 11,922 16,368 37.3%
Net profit margin (%) 6.8% 6.7%
* Consolidated results for BHEL, Blue Star, Crompton Greaves, Cummins, LMW, L&T, Praj Industries,
Punj Lloyd, Siemens, Suzlon, TRF, Thermax and Voltas

Coming to the operating margins, the same witnessed a 1.6% YoY expansion during the quarter. Contract mechanisms such as price variation clauses and hedging of raw materials have helped companies pare pressure on account of rise in material costs off their margins. However, there were select companies (the smaller sized firms) that were negatively impacted by the rise in input costs.

  • Also read - Capital goods: Do rising material costs hurt?

    On the bottomline front, the consolidated numbers are up 37% YoY. During the quarter, some companies were impacted by forex and derivative losses (extraordinary items). If we exclude the same, the profits have grown by a strong 52% YoY. Further, other key cost heads such as interest and depreciation have remained flat at 1.6% and 0.9% respectively of sales as compared to the corresponding quarter in the previous year.

    What to expect?
    Overall, the capital goods sector recorded a strong performance during the June quarter. Furthermore, while execution challenges will remain, we expect companies to benefit from increased infrastructure spending in the country over the next 3 to 5 years. Though a slowdown in decision-making and delays in investments can affect performance in the short to medium term, the fact that India needs good quality infrastructure to sustain growth at high levels remains.


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