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Capital Goods Makers Show Signs Of Rebound

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Demand for heavy equipment by Indian companies, an indirect measure of economic growth, is showing signs of rebound driven by government spending on railways, roads and smart cities ahead of the next general election.

Siemens India Ltd., ABB India Ltd., Thermax Ltd. and Cummins Ltd. beat sales and operating income estimates in the quarter ended September, though higher input costs put pressure on margins. While Thermax and state-run Bharat Heavy Electricals Ltd. felt the impact of a slowdown in the power sector this financial year, brokerages said the government’s infrastructure push led to new orders for others.

Investment cycle continues to strengthen and presents one of the best pictures in a long time, suggesting a strong pick-up even if eye-grabbing large-scale projects are yet to start, Lokesh Garg, analyst at Credit Suisse, wrote in a report. After five weak years, capital goods imports rose at 20 percent in the year ended March and increased 26 percent in the first six months, according to Credit Suisse, showing an improvement in demand.

Agreed Lavina Quadros, analyst at Jefferies. It’s strongest sales growth for industrials in 28 quarters, she wrote in a note. In the last pre-election period of 2013-14, she said execution pick-up was nowhere nearly as sharp as this one.

India’s GDP growth, which has recovered from the shocks of demonetisation and goods and services tax rollout, has been largely driven by government spending on roads to ports in the past four years. But private investments have now started picking up. New project announcements increased after eight quarters of decline in the three months ended September, according to data released by the Centre for Monitoring Indian Economy. That came despite a drop in new projects by the government, according to a report by Motilal Oswal, suggesting a pick-up in private spending.

The Index of Industrial Production also suggests a rebound. Capital goods output has risen 7.3 year-on-year so far this fiscal compared with a 0.3 percent growth in 2017-18.

Fresh Orders

Siemens India, Cummins and ABB, in their earnings call, said the growth was driven by demand from railways, metro and construction companies. .

Order inflow momentum picked up in three months ended September to its highest in eight quarters for the capital goods sector, Aditya Bhartia, analyst at Investec, wrote in a note. It was driven by state roads, airports, water and hydrocarbons sectors, he said.

Jefferies, however, said most managements in their post-earnings call indicated that the pre-election push was not the only reason. There’s an overall pick-up in the construction activity, it said. And Credit Suisse said investments are also likely happening in auto and auto parts, chemicals, consumer, engineering, cement and steel.

Demand for power equipment, however, slowed as reflected in the financials of Thermax and BHEL. That’s because new orders by Power Grid Corporation of India Ltd., which accounts for 45-50 percent of annual transmission capex in India, fell by half in the first half of the ongoing financial year, according to the company’s filings.

So there was a need to wait for data of another two-three quarters to determine if the capital goods sector is moving to a new growth path after eight years of a difficult environment, said Quadros of Jefferies.

Key Highlights From Earnings Calls

  • Private capex is increasing and digitalisation is growing
  • New orders rose 38 percent year-on-year.
  • Earnings beat estimates on strong execution and higher other operating income, helped by growth in power, building technology, railways and industry segments, it said.
  • Double-digit growth across all the segments driving revenue.
  • Increasing traction with utilities to implement digital solutions.
  • Focusing on managing costs and improving net cash.
  • Opportunities from state distributors as Power Grid capex is subdued.
  • Positive on rail, metro, water and smart city projects.
  • Expects margins to improve.
  • Positive sentiment in the domestic market has receded.
  • Optimism on order outlook has moderated.
  • Expects delays in order finalisation ahead of elections and weakness in export markets.
  • Challenging environment in China subsidiary.
  • Industrial, power generation and distribution segments helped it beat revenue estimates in quarter ended September.
  • Middle East and Africa saw recovery in power generation.
  • Increased guidance raised for domestic and exports businesses.
  • Continued traction in infrastructure, railways and commercial real estate.
  • Expect 8-10 gigawatt of new power plant equipment orders.
  • Revenue mix changing in favour of orders from state utilities where payments get delayed.
  • Weak order inflow and falling backlog; working capital rose sharply in the quarter ended September.
  • Management continues to be optimistic on non-power business ordering.

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