Alarm bells had started ringing loud and wild way back in December 2010. That was the first time, after the Lehman collapse that the capital good sector had shown a negative growth at 13.7% and in Jan 2011, it went down further into the negative at 18.6%. This was against a jaw dropping growth rate of 57.9% in Jan 2010.
Fast forward to now. In August the capital goods sector was in the black but growth rate was paltry at 3.9%. In Sep 2011, the sector has once again slipped into the negative at 6.8%. So does this mean we are set to witness another bout of degrowth in the capital goods sector?
And that is why capital goods stocks have been literally hammered down on the bourses. Yesterday, stalwarts like L&T and BHEL touched new 52-week low. Today, Punj Lloyd, Alsthom and Suzlon Energy were at new lows. Thermax is down and BGR seems to be the only stock, currently in the sector which seems to be in green.
The growth of the capital goods sector has always been very volatile, given the huge variations but a declining trend is apparent. What we are seeing is falling investment in the sector and it is unlikely to see a pick unless Gov comes uo with some solid fiscal boosters. Need of the hour is for accelerated public spending but with the Govt already teetering for funds, Govt just cannot afford to do so. Those in the capital goods sector say that order books have come to a virtual standstill.
That is something which has been reflected in the corporate earnings of these companies. In Q2FY12, L&T reported a 20 bps fall in EBITDA margins at 10.4% and the management has stated that coming back to anywhere near 13% in this fiscal might not be possible. Its mainstay engineering and construction segment has seen a steady slide in profit margins since the beginning of this fiscal. The company has guided for a 75-125 bps fall in in EBITDA margins for FY12. A look at the order book of Rs.1,42,000 crore might make one feel that these fears are unfounded. But sift underneath the order book and it comes forth that in Q2 there was a 21% fall in orders on a YoY. And based on this, L&T has revised its order inflow guidance downward at 5% from earlier estimation of 15%.
BHEL on the other hand had a better Q2 performance in terms of sheer numbers with a 24% YoY rise in topline and 23% rise in net profit. Being debt free the operating efficiency helped but this might not continue for too long. BHEL might be debt free but companies placing orders, mainly from power sector are sitting on huge debt and rising interest costs have forced many to postpone orders. 95% of BHEL’s revenue comes from the power sector and hence it’s outlook currently looks bleak. YoY, for H1FY12, order inflow is down 31%. It has set itself an order inflow target of Rs.60,000 crore for FY12 but till end of six months of the current fiscal, it has been able to garner just about one third of the target. Given the slowdown, achieving the rest in second half alone seems like a daunting task.
When the two pillars of the capital goods sector have shown signs of stress, surely the others are bound to be affected. And it is this stress in the Q3 numbers which the capital goods sector is likely to show that has pushed the stocks to new lows.
Does that mean that one should not buy into this sector now? For a long term investor, any new low in a stock like L&T is a buy signal. Accumulate at every fall, keeping a horizon of at least 3 to 5 years. One can avoid Punj Lloyd and BHEL but Thermax and Alfa Laval are good buys. Crompton remains a good long term story at Rs.120 levels. Once the economy bounces back, this is one sector which will zoom up first like a rocket. If only the economy bounces back
Fast forward to now. In August the capital goods sector was in the black but growth rate was paltry at 3.9%. In Sep 2011, the sector has once again slipped into the negative at 6.8%. So does this mean we are set to witness another bout of degrowth in the capital goods sector?
And that is why capital goods stocks have been literally hammered down on the bourses. Yesterday, stalwarts like L&T and BHEL touched new 52-week low. Today, Punj Lloyd, Alsthom and Suzlon Energy were at new lows. Thermax is down and BGR seems to be the only stock, currently in the sector which seems to be in green.
The growth of the capital goods sector has always been very volatile, given the huge variations but a declining trend is apparent. What we are seeing is falling investment in the sector and it is unlikely to see a pick unless Gov comes uo with some solid fiscal boosters. Need of the hour is for accelerated public spending but with the Govt already teetering for funds, Govt just cannot afford to do so. Those in the capital goods sector say that order books have come to a virtual standstill.
That is something which has been reflected in the corporate earnings of these companies. In Q2FY12, L&T reported a 20 bps fall in EBITDA margins at 10.4% and the management has stated that coming back to anywhere near 13% in this fiscal might not be possible. Its mainstay engineering and construction segment has seen a steady slide in profit margins since the beginning of this fiscal. The company has guided for a 75-125 bps fall in in EBITDA margins for FY12. A look at the order book of Rs.1,42,000 crore might make one feel that these fears are unfounded. But sift underneath the order book and it comes forth that in Q2 there was a 21% fall in orders on a YoY. And based on this, L&T has revised its order inflow guidance downward at 5% from earlier estimation of 15%.
BHEL on the other hand had a better Q2 performance in terms of sheer numbers with a 24% YoY rise in topline and 23% rise in net profit. Being debt free the operating efficiency helped but this might not continue for too long. BHEL might be debt free but companies placing orders, mainly from power sector are sitting on huge debt and rising interest costs have forced many to postpone orders. 95% of BHEL’s revenue comes from the power sector and hence it’s outlook currently looks bleak. YoY, for H1FY12, order inflow is down 31%. It has set itself an order inflow target of Rs.60,000 crore for FY12 but till end of six months of the current fiscal, it has been able to garner just about one third of the target. Given the slowdown, achieving the rest in second half alone seems like a daunting task.
When the two pillars of the capital goods sector have shown signs of stress, surely the others are bound to be affected. And it is this stress in the Q3 numbers which the capital goods sector is likely to show that has pushed the stocks to new lows.
Does that mean that one should not buy into this sector now? For a long term investor, any new low in a stock like L&T is a buy signal. Accumulate at every fall, keeping a horizon of at least 3 to 5 years. One can avoid Punj Lloyd and BHEL but Thermax and Alfa Laval are good buys. Crompton remains a good long term story at Rs.120 levels. Once the economy bounces back, this is one sector which will zoom up first like a rocket. If only the economy bounces back
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