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Capital goods: Orders keep coming in - Views on News from Equitymaster
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Capital goods: Orders keep coming in
Aug 25, 2008

The slowdown in capex plans of companies across sectors has raised concerns about the growth prospects of the capital goods industry. High interest rates, along with unfavorable inflationary scenario in commodities (key materials like steel, cement, aluminium and copper) have led to some companies reducing, delaying or even terminating their capex plans. All these factors have had a detrimental impact on investors’ view with respect to stocks from the capital good sector, with the BSE-Capital Goods Index declining by 40% since January this year (as compared to Sensex’s 29% decline).

  • Also read – Opportunities in infrastructure

    Several questions are being raised with respect to the sector’s outlook for the near term, and how long will it take for the situation to stabilise or turn around. While we may not have the precise answers to these questions pertaining to the short to medium term, we believe that given the infrastructure requirements of the country, companies from the capital goods space (especially those with market leadership and presence across several segments) will continue to benefit in the long run. And if the order books of some of these companies are concerned, they do not necessarily paint a grim picture.

    Order backlog position of major companies as on June 2008
    (Rs bn) Order backlog Sales (TTM) As times of sales
    BHEL 950 205 4.6
    L&T 563 273 2.1
    Punj Lloyd 202 90 2.2
    Suzlon Energy* 165 76 2.2
    Nagarjuna Cons 122 37 3.3
    IVRCL Infra 124 39 3.2
    Simplex Infra 100 32 3.1
    HCC 102 32 3.2
    Patel Engg 60 14 4.3
    Siemens 98 81 1.2
    BEML 40 24 1.6
    ABB 68 64 1.1
    Thermax 26 33 0.8
    Mcnally Bharat Engg 25 6 4.5
    Elecon Engg 18 9 2.1
    Total 2,664 1,013 2.6
    * Order backlog as of July 2008. TTM - Trailing twelve months. Source: CMIE

    As we can see from the above table, most of the companies from the capital goods and construction space are in a comfortable position with their order backlog exceeding their trailing twelve month sales by 2 to 3 times. Even if we take a consolidated picture of all the above-mentioned companies in the capital goods/ construction space, the order backlog exceeds the sales by a very healthy 2.6 times.

    To view a broader picture, the adjacent chart gives a good display of how rapidly the order books of leading companies from the construction space have been growing. The chart indicates the aggregate order backlog of the top five companies (order book wise) on a QoQ basis. These companies are – L&T, Punj Lloyd, IVRCL Infrastructure, Nagarjuna Construction and HCC. We can notice that there has been no slowdown in order inflows. As compared to an aggregate order backlog of Rs 784 bn in June 2007, these companies have recorded an aggregate of Rs 1,093 bn as backlog in June 2008, or a growth of 39% YoY. Further, companies are also continuing to gain orders from the international markets.

    Is everything hunky dory?
    Now, while accretion to order book and building up of large backlogs provides these companies with the much required revenue visibility for the next 2 to 3 years, the fact that execution issues have cropped up and have the ability to derail growth in the future cannot be denied. Issues on account of raw material shortage and subsequently their rising prices, manpower retention and cost overruns on projects are something domestic capital goods companies have to face going forward. In such a scenario, despite the visibility, expectations of growth and stock market returns have to be lowered.

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