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APR 29 2017

Government orders may come to the rescue of capital goods companies, again

  • Economic Times, ET Bureau / Hyderabad
  • Created: Sat 29th APR 2017

Government orders were the key driver for capital goods and engineering companies last year and may continue to be so in 2017-18 as the order pipeline reveals more state-funded schemes and far too few private sector projects, analysts and industry executives said.

Companies including Larsen & Toubro, ABB and Siemens are eyeing more government projects than ever as the private sector remains jittery about investments. “Order flows continue to be dominated by public sector capex, led by sectors like power transmission & distribution, railways, metros and hydrocarbons," HDFC Securities said in a pre-earnings report. “Orders from Power Grid grew 112% year-on-year to Rs 8,020 crore in Q4 FY17. Power generation orders continued to be muted, with no major orders announced by BHEL."

The aggregate order inflows by major capital goods companies, excluding L&T, declined 20% to Rs 16,500 crore in the fourth quarter from a year earlier, according to Elara Capital. The contracts were driven mainly by railways, transmission & distribution, renewables & water treatment.

Analysts said L&T has so far announced Rs 15,500 crore of orders in the fourth quarter, although the final number may be higher since the company may not have disclosed all wins. The sector bellwether's guidance for 2017-18, which it will announce with its annual results, will be tracked for cues, given its wide exposure to different sectors. Besides lower order inflows, the pace of project execution continues to be slow.

“We expect that domestic capital goods sector would continue to be impacted primarily due to slower execution, lower order inflow and poor financial health of the power distribution companies. We believe announcement of Uday scheme for discoms is positive, which is likely to result in better cash flows and new investments in state T&D networks and independent power producers,“ Reliance Securities said. The Uday scheme is aimed at reviving debt-laden state-owned power distribution companies.

Power transmission & distribution companies are likely to have ended FY17 with robust order books due to higher demand for engineering jobs, wires, cables, towers and substation projects from Power Grid and state governments. Kalpatru Power bagged about Rs 2,900 crore of orders, while KEC announced international contracts worth Rs 1,900 crore. However, brokerage Motilal Oswal said in a recent report that Power Grid will focus more on high-end technology products, for which multinational companies such as GE T&D, ABB India and Siemens are “best positioned.“

Mumbai's much-awaited coastal road project saw L&T and HCC among the dozen bidders. Analysts said mega projects would be the key drivers for the capital goods and engineering firms.

ET VIEW: Private Investment Will Revive

Anaemic private investment has constrained growth, and adversely impacted the balance sheets of many of these companies. The biggest drag is the banking system laden with bad debt which stalls it from stepping up private investment. Policy action — enforcement of the bankruptcy code — is underway to clean up banks' books. It will make banks free to start lending again, and help revive private investment and boost growth.

Tags

RAILWAYS Banking Bombay Electricity Supply and Transport Power Grid Distribution Companies Independent Power Producers Grid Power Generation Bharat Heavy Electricals Ltd Power Distribution Hydrocarbons Mumbai Siemens Power ABB India Siemens

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