Capital goods sector pins hopes on new orders

The capital goods sector remained an underperformer extending the decline in sales and net profit to a fourth consecutive quarter. The sector registered a steep 36 per cent decline in net profit in the quarter ended 30 June 2014 (Q1FY15). This fall is attributed mostly to subdued sales.

The decline in sales was primarily due to customer-centric delays affecting execution, says capital goods analyst at Edelweiss Research. However, despite dispersions in revenue growth, margins were broadly in line, mainly due to gross margin expansion and cost saving measures undertaken by companies.

The study is based on companies that manufacture electrical equipment required for power plants such as generators, turbines, switchgear and transformers. It, however, excludes diversified firms like Larsen & Toubro, Voltas and a few others that manufacture electrical and home appliances.

The Q1-FY'15 results were subdued across all firms with strikingly gloomy show by industry leader BHEL. Thermax, Siemens, BGR Energy, BEML, and Alstom India too reported decline in sales and profit. Sales grew at single digit for Crompton Greaves, ABB, Kalpataru Power, Kirloskar Oil and a few others.  

Falling sales pulled down operating margins of public sector electrical equipment maker Bharat Heavy Electricals Ltd (BHEL) by 53 basis point year-on-year.

On the operating margin front, cost saving measure restricted margin fall to 53 basis points from a fall of 335 basis points in Q4FY14. Net profit was affected by a combination of negative operating leverage, higher interest cost and depreciation (due to change in norms).

Execution delays in large projects and lower carry-forward orders impacted BHEL. The company's sales dropped 20 per cent driven by sluggish execution, primarily in the power segment due to customer-centric delays. Operating performance was hit by sharp fall in sales.

Sales and profit of Crompton Greaves rose by around 7 per cent while operating margins rose by 50 basis points. Net loss in overseas entities remained high at Rs62.5 crore, which management expects to reduce in following quarters.

Cummins India managed to report flattish revenue growth buoyed by 40 per cent growth in exports.

Thermax reported a 228 basis points margin decline, impacted by low margin EPC orders and losses in water and waste solutions.

BGR Energy saw a steep fall in sales of over 23 per cent, mainly due to execution delays in the NTPC and Iraq orders. Operating margin dipped by 228 basis points due to execution of low margin NTPC orders. Net profit plunged 71.5 per cent due to weak operating performance and higher depreciation.

Going forward, as per latest Moody's Investor Service report, manufacturing activity is expected to accelerate over the next two years, supported by positive sentiment and a policy focus on investment.

Quarterly growth rate of key capital goods players (%)

Net sales

Net profit

Quarter ended

Q2FY14

Q3FY14

Q4FY14

Q1FY15

Q2FY14

Q3FY14

Q4FY14

Q1FY15

B H E L

-15.20

-15.73

-21.73

-20.23

-64.22

-41.21

-43.02

-58.43

Crompton Greave

9.60

12.79

12.36

7.72

38.91

-132.75

152.55

6.56

Siemens

-2.49

-4.12

-8.60

-10.40

-367.51

2.34

194.72

-126.62

A B B

-1.32

5.95

-7.86

3.73

77.96

249.37

20.02

20.34

K E C Intl

6.34

22.99

1.87

-1.42

34.04

-34.71

-346.59

-228.62

Kalpataru Power

33.95

18.38

11.65

19.24

16.77

-4.07

-3.31

20.74

Cummins India

-14.47

-6.60

-15.25

0.39

-10.02

-37.10

-24.80

27.56

Thermax

-12.82

-2.64

-6.30

-2.39

-66.87

-12.72

-8.16

-17.59

Jyoti Structures

9.45

6.90

39.36

-2.97

22.53

3.58

-156.44

-197.74

BGR Energy Sys

31.84

3.81

-23.60

-23.22

0.98

-31.23

-64.55

-71.56

Sector

-1.81

-0.47

-6.34

-1.68

-41.48

-13.98

-34.32

-35.88

Data source: Capitaline +