Aug 12, 2008|
Capital goods: June quarter review
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
* Consolidated results for BHEL, Blue Star, Crompton Greaves, Cummins, LMW, L&T, Praj Industries,
|Operating profit (EBDITA)
|Operating profit margin (%)
|Profit before tax (PBT)
|PBT margin (%)
|Share of profit & loss of associates
|Profit after tax/(loss)
|Net profit margin (%)
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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