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Pandemic to impact earnings of capital goods majors

Shubhra Tandon
capital goods, Covid-19, Coronavirus outbreak, BHEL, ABB, Siemens, Edelweiss

Capital goods companies are bracing themselves for a depressed fourth quarter, as they grapple with prolonged order conclusions due to the Covid-19 scare. The impact of this contraction could well spill over into the first quarter of next financial year too.

While the companies are still assessing the extent of the impact on their earnings, with the quarter closing just 15 days away, the mood is grim. Larsen and Toubro chief financial officer R Shankar Raman told FE, "It is an evolving situation. Trying to update assessment". According to Thermax managing director & chief executive officer MS Unnikrishnan, for the past one month since the worry around Covid-19 started becoming serious in India, order conclusions for fresh capacity creation is almost at a standstill in the overall capital goods sector. "There aren't any orders getting concluded for equipments," he said. Also, the orders that were concluded prior to the novel Coronavirus outbreak, are not getting confirmed, as clients hold back advances to be paid towards order confirmation.

Commentaries from most companies in the engineering and capital goods space were not optimistic in the October-December quarter itself, and Covid-19 has made the situation more worrisome. "Most companies highlighted deteriorating macroeconomic trends and strained government finances, affecting order outlook, execution challenges and working capital stress emanating from a tightened liquidity situation," analysts at Emkay Research said in a recent report. The revenue growth remained muted at most companies, with growth of just 1% on a year-on-year basis and an 8% y-o-y decline in order inflows, mostly due to a decline seen in companies such as BHEL, ABB and Siemens.

To add to the woes of the capital goods sector, industry experts say that normally there is a frenzied order completion activity in the month of March, which is missing in this time of the year. "All of us will be hit in March in terms of our revenue recognition," Unnikrishnan said. There is only one silver lining that currently there are no major delays in execution of the orders that are in the order book already.
However, according to analysts if the problem persists there will be a risk of potential slippages in project execution both in the domestic and overseas markets. Edelweiss Securities has slashed earnings across its coverage of industrials sector by an estimate of 5–20% for financial year 2020-2021 "building in slower exports and much weaker domestic execution given rising uncertainty/weak demand scenario".

"While we expect an overall recovery over two–three years as demand normalises, exports' recovery may well be underwhelming given an uncertain macroeconomic environment, the weakening outlook for oil prices, and the risks stemming from the Covid-19 outbreak," said analysts.

For Bharat Forge, for instance, analysts have lowered their estimates of industrial exports, led by hydrocarbons for the financial year ending March 2020 to a drop of 55% versus 50% earlier. The estimates are flattish for the next financial year, where a 15% growth was expected earlier. Covid-19 and global slowdown is estimated to delay Thermax's management plans for getting incremental growth from international markets. Exports make up for 40-45% of revenues for the company.

Meanwhile, L&T is expected to face some delays in projects in the Middle East or oil and gas supporting economies, analysts at Edelweiss observed. The heavy engineering to infrastructure major's order intake for FY21 could be at about 10% versus estimates of 12% earlier.

For Cummins, analysts have lowered FY21 estimates for exports growth to flattish against 6% growth pencilled in earlier, while domestic growth is assumed to be 8% now versus estimated 12% earlier.
"All growth plans of companies will not happen in the current quarter. There is a delay in receiving input materials as unloading from ships is taking longer in the wake of precautions taken against COVID-19, which is delaying processing in the country," Unnikrishnan said.