Most capital goods, engineering and infrastructure companies have seen a sharp rise in their share prices in 2023, with the sector index up 46% so far this year. This is mainly due to the government’s focus on infrastructure development in the run-up to the parliamentary elections.
The increased focus on government-backed capital spending, mainly directed at sectors such as railways, power and defence, spurred investment interest and fueled optimism in these industries.
It is no surprise that foreign portfolios have also shown keen interest in capital goods companies amid the current scenario. According to the data on institutional flows in October, foreign portfolio investors bought more shares of industrials, while there was a significant sell-off in financial stocks, according to a note by ICICI Securities on November 22.
Capital companies are expected to maintain stable earnings growth in the second half of FY24 due to successful order backlog execution, while steady commodity prices may boost earnings.
Sector ringer Larsen & Toubro Ltd (L&T) has received orders worth ₹89,153 crore in the September quarter (Q2FY24), up 72% YoY. L&T’s order prospect pipeline from September 2023 also looks strong ₹8.8 trillion. The engineering, procurement and construction major expects to exceed its order inflow target of 10-12% and revenue growth forecast of 12-15% for FY24.
Some analysts believe that around 60% of L&T’s order book is yet to reach the margin threshold, which means that improvement in profitability could be gradual.
During Q2, ABB India, Cummins and Thermax saw an increase in operating margin due to high quality product mix, operating leverage and normalized commodity prices.
“Higher margins should continue (for manufacturing companies), perhaps even seeing slight improvements in the future due to continued demand and decline in commodity inflation,” said Parikshit Kandpal, analyst at HDFC Securities. “However, a key consideration is whether companies can successfully pass on price increases to customers or take those increases back,” he added.
Some companies may face challenges in exporting due to a possible decrease in capital spending by customers amid a global recession and geopolitical tensions. In addition, volatility in raw material costs and the upcoming general elections in India could disrupt the supply chain, and hamper the current pace of ordering, especially in the near term.
Some infrastructure companies face a difficult outlook. Bidding for road projects remained weak, with awarding pushed to the second half of the year. According to Antique Stock Broking, project bid activity from April to October was flat year-over-year at ₹7.3 trillion. New project announcements in October decreased 37% to ₹87,300 crores.
Also, NHAI’s award performance was sluggish in the first half of FY24. Against this backdrop, KNR Constructions cut its order inflow guidance in FY24 to ₹3,000-4,000 crore from ₹4,000-5,000 crore earlier. At the same time, PNC Infratech has maintained its FY24 order inflow growth guidance of 10-15%, and still expects up to Rs10,000 crore of new orders in the current fiscal.
“Due to healthy execution in the absence of new orders meant that the book-to-invoice visibility decreased to 2.8 times during the quarter against 3 times at the end of Q1FY24,” said Elara Securities, commenting on the September quarter performance of infrastructure companies. Book-to-bill ratio reflects demand for closing orders.
The project awarding has been delayed due to the government’s strict policy of ensuring that all clearances, including land acquisition, are in place before awarding. Award activity is expected to improve in the second half of FY24. To ensure revenue visibility beyond FY25, it is important for road construction companies to secure new projects in the medium term, along with better execution.