Larsen and Toubro and Bharat Heavy Electricals contributes significantly to the overall revenue performance for the Capital Goods sector in India. There are various segments under which L&T reports its revenues. The main segments are Infrastructure, Power, Heavy Engineering and Hydrocarbon. The order inflows for L&T and BHEL can be taken as a proxy for the overall capital goods sector in India.
The revenue growth was relatively better for Larsen and Toubro and it declined for companies such as Bharat Heavy Electricals, ABB India and Siemens India for the second quarter of the current financial year. The order book for companies such as Larsen and Toubro and Siemens remain robust. The net profit growth was stellar for Larsen and Toubro and ABB India due to cost control measures and its implementation. Uncertainty due to GST implementation reflected in the dismal performance for all the companies on the revenue front.
Normally growth in the order book for large companies such as L&T indicates strong revenue performance in the near future as execution used to be on track. But lately execution has also lagged to some extent given various issues in the implementation of the GST. Execution would come right back on track in the time ahead for capital goods sector as and when the uncertainty settles down and business environment revives.
L&T has in the second quarter of FY 2017-18 reduced the growth guidance from 12 per cent in the first quarter to 0 percent for order inflows and has maintained a 12 per cent guidance for revenue growth for 2017-18, which hinges primarily on government spending. The June and September quarter order flows were both lower by 11% and 8% year-on-year (y-o-y), respectively. Reduction on the growth guidance is what would be more concerning for the market as it would affect financial performance in the future to some extent.
The value of the order book of the company stood at Rs.2.575 trillion at the end of September 2017 (up 2% y-o-y). Order inflow reflects muted capex environment with the trend of higher public-sector outlay vis-a-vis reduced capex of private sector.
Apart from the decline in revenues for ABB India and BHEL the order inflows were flat to negative for these companies which reflects a long road ahead to recovery.ABB India Ltd, which has a healthy order backlog, reported a 12% drop in revenue, mainly due to GST-related disruptions. Adjusted for one large rail order in the year-ago quarter, order inflows were flat.
For most of the Engineering projects in the country related to infrastructure Government spending was responsible for the inflow orders in the recent quarters. Private spending and investment related to infrastructure has not shown any recovery in the second and first quarter of FY 2017-18 and is not expected to pick up anytime soon. Firms with exposure to government investments in power transmission, railways and infrastructure sectors are seeing increased order inflows.
The valuations seem overtly expensive for companies such as ABB India (P/E 79) and BHEL (P/E 74) while those for L&T (28) and Siemens (38) look relatively reasonable if we compare the overall business outlook for the FY 2017-18. Revenues would 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.