Capital goods, engineering players stare at tough FY19

Capital goods, engineering players stare at tough FY19

MUMBAI: The capital goods and engineering industry may be in for a tough year in 2018-19 as the previous year ended on a dismal note with new project announcements in the January-March period being one of the lowest in any fourth quarter since 2005.

Government orders have been the key driver for capital goods and engineering companies for the past two-three years as private sector capex remained muted. But industry data and anecdotal evidence show slowing of orders even from government agencies.

The bigger concern is that order inflows may slow down further in the second half of fiscal 2018-19, as the country heads for the next general elections in April-May 2019, industry executives said.

“New project announcements in 4QFY18 were one of the lowest in any 4Q since 2005. However, even as the absolute quantum of new projects is lower, the quality of projects is better as low visibility projects accounted for only 7% of 4QFY18 new announcements versus 28% in 4QFY17,” Phillip Capital India Research said in a report.

“We believe that a broad-based recovery in the capex cycle is still absent. A revival in capex would be led by starting of stalled projects, as conversion of new project announcements into projects under implementation would take time to gather momentum,” the report said.

State-run Power Grid Corporation of IndiaNSE -0.15 %, which accounts for almost 40-45% of annual investment into the power transmission sector, ordered the lowest amount since 2008-09 in the absence of large orders. The company ordered projects totalling around ?9,000 crore in 2017-18, down 68% year-on-year, denting the order flow to engineering companies in the sector.

While the sector has partially recovered from the combined impact of demonetisation and goods and services tax on order execution, muted order inflow casts a shadow on revenue visibility going ahead. Also, industry executives said the Reserve Bank of India’s new guidelines on stressed assets will further hurt cash-strapped infrastructure companies’ ability to invest

“Post demonetisation and GST (goods and services tax) impacting growth in the first half, we expect execution ramp up to continue in Q4FY18, after 11% year-on-year growth in Q3FY18. We estimate 15% yo-y revenue spurt aiding 50 bps margin expansion,” brokerage Edelweiss said in a fourth-quarter result preview. “Among public spending verticals, railways and infra continued to see significant order finalisation, followed by T&D. Pickup in greenfield projects continues to remain a key monitorable as it is crucial to drive the next leg of growth of engineering, procurement and construction companies, which we believe is around 12-15 months away.”

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