Engineering cos. ripe for a recovery?

Thu, 5 Jan Pre-Open

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According to an article in a business daily, India Inc. has finally put an end to the declining trend in order flows. Orders have seen an 18% quarter-on-quarter (QoQ) growth in 3QFY12 (Oct-Dec quarter of 2011-12). Things also seem to be improving as the annual year-on-year (YoY) decline in orders has slowed to 5% in 3QFY12 from 24% levels seen in 2QFY12.

This quarter's growth was largely led by strong orders registered by power equipment manufacturers. They received orders worth Rs 178 bn in 3QFY12, a 138% growth over the previous quarter. Engineering majors including Bharat Heavy Electricals (BHEL) and BGR Energy are finally seeing a pile up in new orders. This is after a disappointing performance earlier this year.

But, even though there are signs of improvement overall growth still remains in single digits. According to the Indian Electrical and Electronics Manufacturers' Association (IEEMA), the domestic electrical equipment industry registered a moderate growth of 7.7% in the 1HFY12. An important reason for the slowing growth trend was a sharp growth in imports of transformers, reactors and insulators. These came from China, South Korea, Germany and Eastern Europe. But, since China gave out subsidies to compensate for rupee depreciation, plus an additional discount, they stole the show.

So what does the future hold for the engineering companies? A lot of companies are still not willing to put their money on the line. They are instead opting for a 'wait and watch' policy. Uncertainty still exists in the economic and financial environment. Lack of faith in the government for policy action is also a pressure point. But, any improvement in outlook will have a commensurate impact on these companies. According to Mahesh Vyas, the Managing Director & CEO of the Centre for Monitoring Indian Economy (CMIE), the slowdown in orders was a short-term blip due to supply bottlenecks in raw materials like gas, iron ore and coal. Once these issues are sorted out things should be back to normal. Well with interest cuts on the horizon and the government increasing export duty on key raw materials like iron ore, maybe a recovery is due. But this is not going to be easy since the government still has a long way to go in terms of fiscal consolidation. Plus one also still needs to see how commodity prices play out in 2012.