Capital goods: GST adds to business slowdown

The implementation of the goods and services tax (GST) and the subsequent disruption added to the woes of capital goods makers in the September quarter (Q2). Slow decision-making impacted execution, which, in turn, weighed on revenue and order inflows. “Overall, the market demand slowed down in Q2 due to business and operational uncertainty post the introduction of GST and sluggish demand from private investments as corporates continued to adopt a wait and watch approach,” Blue Star Ltd said about its electro-mechanical projects division.

ABB India Ltd, which has a healthy order backlog, reported a 6.8% drop in revenue, mainly due to GST-related disruptions. Adjusted for one large rail order in the year-ago quarter, order inflows were flat. According to ABB, “teething issues of the new GST structure caused an impasse for several small and medium enterprises, leading to deferrals and delays as customers await clarity.”

As a consequence, execution got delayed, affecting revenue. An analysis by Kotak Institutional Equities shows a decline in domestic revenues of four notable companies.

Larsen and Toubro Ltd (L&T) reported decent earnings performance. But that provided no major reprieve. L&T sharply reduced its full-year (FY18) order flow guidance, tracking the delays in conversion of opportunities into orders.

“Domestic order flow was down 23% y-o-y, which was partly impacted as clients delayed decision making given focus on GST implementation,” Jefferies India Pvt. Ltd said in a note. Commentary from Blue Star indicates spending continues to be largely driven by government infrastructure projects such as metros and healthcare. New orders from the heavy industrial and factory segments continues to be muted, Blue Star adds.

Given that the industrial and consumer sectors are still in recovery mode, not many are seeing a major recovery in the near term. Further, as IDBI Capital Markets and Securities Ltd points out, thermal power equipment suppliers may face intense competition and profitability pressures, given the excess capacities and weak project pipeline.

While the concerns are expected to weigh on revenue performance of the companies in the immediate future, stock valuations continue to defy the ground realities.

“However, the market has already priced in a strong recovery in revenues and profits, as can be seen in the high valuations of industrial and infrastructure stocks,” Kotak Institutional Equities said in a results review note. “We expect revenues will continue to be weak for the next few quarters before improving, led by the government’s increased infrastructure spending and eventual recovery in private sector investment.”

Source: http://www.livemint.com/Money/2O66KReaGEb0mJjgbuKgkJ/Capital-goods-GST-adds-to-business-slowdown.html

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