The capital goods sector last saw good times in FY11 when orders from the power segment had peaked. Ever since, it has been a downhill slide for capital goods companies. A weak capex cycle meant fresh orders dried up and existing orders got delayed as clients put projects on hold. Expectations from a stable new government now run high.
For the trailing four quarters, the sector on aggregate saw Q2 revenue growth flat over the previous year. Operating profit growth was similarly flat as were margins. Out of the top 20 capital goods companies by market capitalization only seven reported any positive sales growth. BHEL -the big daddy of the industry that grabs more than half of all BTG orders in the country was in for continued troubles. BHEL's profits fell 80 per cent (y-o-y) in Q2. Revenues declined 32 per cent. Operating margins fell from five per cent to 2.9 per cent.
The rough patch for capital goods companies is likely to continue even if the economy picks up, says a report by JM Financial Institutional Securities. A higher GDP growth of 8.5 per cent is likely to result in a power demand growth of 7.5 per cent p.a. On the other hand, coal-based power plant capacity is expected to grow by 8-10 per cent. This means even with addition in plant capacity, plant load factor is not likely to go higher than current levels of 70 per cent. Fresh power capacity addition therefore could remain sluggish and lead to delayed or slow project ordering in the next three-four years. Capital goods companies consequently could see a rough FY15-16 before showing definitive signs of improvement in order inflows thereafter.
The BSE Capital Goods Index has had a gained as much as 50 per cent year-to-date. The capital goods firms on aggregate trade at a valuation of 27 times. With no earnings growth recorded for the sector, this valuation looks stretched any way you look at it. Not a place to look at for the time being. Stay away.
Star performer of the sector
Alstom T&D India
It is a specialist in extra high voltage (EHV-765kV). It is on a roll given the upgrade of the country's grid to 765 kV. Alstom is the market leader in this category with a 60 per cent market share. It has gained 112 per cent this year and now appears quite expensive at a valuation of 80x. Stay away for the moment with an eye on earnings growth.
Weak revenue and profit growth
|Company Name||Sales Growth YOY||PAT Growth YoY||TTM EPS (G) YoY||TTM Ebitda margin (%)||D/E||ROCE|
|ABB India||0.0121||0.5025||0.5025||6.86 (5.21)||0.23||12.49|
|Crompton Greaves||0.0934||-6.9803||-7.0084||6.47 (3.84)||0.66||10.91|
|Alstom T&D India||0.1825||0.4693||0.3722||10.05 (9.43)||0.4||17.54|