Tuesday, December 07, 2021

Capital goods: Headwinds faced by BHEL & L&T cast a shadow over rebound in economy

BHEL’s order book reportedly contracts by 10% y-o-y; L&T’s down 10% y-o-y for December quarter.

Written by Anil Sasi | New Delhi |
February 13, 2017 12:26:49 am
BHEL, bharat heavy electricals ltd, larsen & tourbo, capital goods, indian express news, economy, companies According to latest numbers put out by BHEL, even as it encouragingly moved back from the red to post a Rs 359-crore profit in the fiscal till December, the firm’s order book of Rs 98,400 crore has reportedly contracted by 10 per cent against a year ago.

Continued headwinds faced by Bharat Heavy Electricals Ltd (BHEL) and Larsen & Toubro (L&T), the two flag bearers of the crucial capital goods sector that is widely considered to be a proxy for investment sentiment, belie the expectation of an impending uptick in the economy.

According to latest numbers put out by BHEL, even as it encouragingly moved back from the red to post a Rs 359-crore profit in the fiscal till December, the firm’s order book of Rs 98,400 crore has reportedly contracted by 10 per cent against a year ago. This was on account of sluggish new orders, with inflow during the December quarter (at about Rs 1,300 crore) recording a drop of 80 per cent from last year.

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Mirroring the trend, the L&T management has revised its growth forecast for both its expected order inflow and revenue for the current fiscal. “It is possible for us to end the year with a 10-per cent growth in order inflow against the 15 per cent we had guided earlier,” said Shankar Raman, chief financial officer of L&T, while announcing December quarter numbers. The firm’s revenue growth forecast has also been revised to 10 per cent from 12 per cent. L&T’s order inflow for the December quarter was at Rs 34,890 crore, a 10 per cent drop from the year-ago period.

“Order inflow declined due to muted domestic capex and delay in awards,” said Raman. He added revenue forecast has been lowered due to current execution challenges and the firm does not expect these headwinds to go away soon.

The slowdown in broader economy, meanwhile, is reflected amply in fresh investment numbers. During the December quarter, according to numbers compiled by the Centre for Monitoring Indian Economy, new investment proposals worth Rs 1.25 lakh crore were recorded, compared with an average Rs 2.36 lakh crore seen per quarter in the preceding nine quarters of the NDA government. According to data from the Central Electricity Authority, during the first three quarters of the current fiscal, the operating requirement of coal and lignite thermal power plants — the mainstay of India’s electricity grid — has dipped under the 60-per cent mark, a 10-year low. Government estimates for the April-December 2016 period show the average Plant Load Factor (PLF) of the thermal power stations has slid to a decadal low of 59.64 per cent on account of sluggish industrial load resulting in the projected demand for electricity trailing the pace of commissioning of new power projects, alongside a pick-up in the addition of renewable projects to the country’s energy mix.

After factoring in the signals from the broader economy, and considering that BHEL’s total order inflows for the nine months ended December was at about Rs 6,500 crore, analysts project inflows at about Rs 15,000 crore for FY17, down from last year’s Rs 36,000 crore order inflow.
According to L&T’s Raman, land acquisition problems and right of way issues continue to be a challenge. “Second challenge is of liquidity where there is an NPA (non-performing asset) overhang on new completion of new financial closures. Some clients are pacing execution to suit their needs, clearance of work certificates are taking longer,” he said.

On the investment climate, he added, “It remains challenging. Private sector capital investment is still shying away, government outlay on large programme continues to remain elusive, announced with delays and award timelines are extending.”

A senior Department of Heavy Industries’ official, when asked about the worrying signals in the capital goods sector, said the government has already formulated a policy to increase the share of capital goods from 12 per cent to 20 per cent in total manufacturing activity by 2025. The policy, the official said, aims to make India “one of the top capital goods producing nations by raising the total production and exports level significantly” and “envisages improving technology depth of the Indian capital goods to reach advanced level”.

He said: “Implementation of the policy will result in increased production level and exports with improved technology depth in the domestic capital goods industry. Since capital goods is the ‘mother industry’, this will have a cascading effect on other sectors. The policy envisages rise in direct employment from the present 1.4 million to five million and increase in indirect employment from five million to 25 million, with the implementation of interventions recommended in the policy.”

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