Rise in profits may not signal revival of capital goods sector: Analysts

Capital goods companies, including Larsen & Toubro (L&T), Bharat Heavy Electricals, and KEC International, have reported healthy profit growth in the October-December quarter, but analysts do not want to take it as a sign of revival of the sector.

“There are signs of capital goods recovery, but it should be viewed with qualification. The goods and services tax (GST) has led to substantial disruption in terms of de-stocking and restocking, resulting in volatility. Therefore, what we are seeing today is higher production in certain quarters of the capital goods segment — non-electrical machinery and transport (buses, tractors and trucks). It is not yet generalised,” said Madan Sabnavis, chief economist, Care Ratings.

Rohit Natarajan, analyst, institutional equities, IDBI Capital Markets, said: “There is no revival yet. These are just small pockets of brownfield capital expenditure or opex-led order inflows.”

“The capacity utilisation of existing assets continues to be low," he added.

Order inflow numbers need to show a healthier trend, which will be difficult under these conditions, he said. More importantly, since orders are fewer to come by, they are often bagged at very low rates.

A bigger concern for companies and industry experts is that average capacity utilisation continues to remain low. “While inquiries in the domestic segment have increased in the recent past, their conversion into orders is likely to be prolonged since capacity utilisation continues to linger at lower levels,” an analyst with Emkay wrote in a report on Thermax dated February 12.

According to the Reserve Bank of India (RBI) data, at the aggregate level, capacity utilisation in the manufacturing sector recorded a slight uptick at 71.8 per cent in the quarter ended September 2017. It is, however, marginally lower than the 72 per cent reported a year ago.

According to TK Sridhar, chief financial officer, ABB India, the pick-up is more operating expenditure-driven, while capital expenditure continues to be missing. “We have been able to diversify our customer base from conventional sectors into those where we see more customer visibility, which helps us to grow in a challenging market. Now or later, the market is bound to revive, but how long it will take is anyone’s bet. We keep preparing for this revival though,” he added.

Industry executives point to a positive trend in sectors including power transmission, roads, and oil refining. However, there are concerns over a decline in government spending, which has been the primary contributor to investments so far. “There is not much demand for capital goods because of the low capacity utilisation and hence it is only on the infra side that we are seeing positive signs. Here, too, the government will go slow on cutting back on capex and the demand for machinery will be gradual,” Sabnavis added.