A slowdown in virtually all cyclical sectors meant order books for the capital goods industry as a whole de-grew in FY14. As economic growth is expected to pick up, will it mean reviving fortunes for the industry? Here are CRISIL's views.
A slowdown in virtually all cyclical sectors meant order books for the capital goods industry as a whole de-grew in FY14. As economic growth is expected to pick up, will it mean reviving fortunes for the industry? Here are CRISIL's views:
- The capital goods industry has experienced significant headwinds in the past few years due to the slowdown in the investment cycle caused by muted economic growth. Project execution has also been sluggish on account of delays in government clearances, land acquisition and cash flow constraints in end-use sectors.
- The order book of capital goods (linked to power sector) companies fell by about 9 percent (y-o-y) in 2013-14. Power sector investments slowed on account of fuel availability issues and weak financial health of state distribution companies, which adversely hit segments such as boiler turbine generator (BTG) as well as transformers and switchgears. Road sector investments have also slowed due to delays in government approvals, muted traffic growth and funding constraints of developers, which has put downward pressure on construction and earthmoving equipment.
- Revenues fell by 10 percent (y-o-y) in 2013-14 due to a lower order book coupled with slowdown in execution.
- Competitive intensity in the capital goods space also remained high because of low capacity utilisation levels and aggressive participation from Chinese and Korean players.
- Operating margins declined by about 400 bps (y-o-y) to 9 percent in 2013-14 due to escalation in project costs, low capacity utilisation and write-off of receivables.
- Net margins declined by 250 bps (y-o-y) to 5.5 percent on account of low operating profits and high interest costs. Short-term borrowings increased owing to delayed payments and capital invested in stalled projects. However, this was partially offset by higher other income and lower tax liability.
- In 2014-15, we expect the capital goods sector's revenues to stabilise led by expansion of the industry's footprint to international markets such as Africa and the Middle East.
- However, the growth in the domestic market is expected to remain under pressure as infrastructure investments are expected to see an uptick only in the second half of the fiscal. In terms of profitability, CRISIL Research expects the downward pressure to continue with weak demand and high competition. However, over the long term, CRISIL Research expects growth to be robust on the back of the governnment thrust on infrastructure and improving electricity access.
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