Private Capex Gains Traction As Capital Goods Firms' Order Books Grow: ICRA
Growing order books of capital goods companies indicate traction in private capital expenditure in the fiscal ending March 2023, according to ICRA Ltd.
The government's investments toward infrastructure creation, coupled with policies to achieve self-reliance in manufacturing (through production-linked incentives), strengthening technical competence and net-zero carbon are driving growth in the capital goods sector, the ratings agency said in a report.
“This apart, healthy demand prospects in several end-user segments supported by a recovery in consumer demand are resulting in capex traction,” it said. “Some of the key industries showing healthy capex include energy (power generation, predominantly renewable and storage, transmission, oil and gas, green hydrogen), digitalisation (including data centres), core industries (cement, metals) and corporate sectors (automotive/ mobility, pharma, chemicals, textiles, among others).”
India's infrastructure thrust is evident from the government's capex spending rising in the union budget for 2022-23. The country has also announced the National Infrastructure Pipeline comprising projects worth Rs 102 lakh crore. It has allocated Rs 2.75-lakh-crore under the PLI scheme.
ICRA has studied two groupsamples of capital goods companies—original equipment manufacturers and engineering and procurement companies with captive manufacturing of engineered/ fabricated products. “The revival of capex in various end-user industries resulted in strong order booking in the past fiscal, which in turn allowed order book to expand at the highest levels in last six years, providing healthy revenue visibility.”
“While order books have expanded appreciably in recent quarters led by both public and private sector capex across several sectors, uncertainties arising from factors like supply chain, geopolitical tensions and any restrictions on account of Covid-19 resurgence could dampen order execution or future demand inflow,” said Sabyasachi Majumdar, senior vice president and group head at ICRA.
The sector, he said, has been affected by a sharp increase in commodity prices, especially crude oil, fossil fuel, metals as well as logistics costs (especially on exports)—any significant relief from which is unlikely in the near term.
“This could adversely impact the operating margin of capital goods companies given the majority of contracts being fixed price in nature, which restricts the ability to pass on price hikes to customers, despite revenue growth expectations.”
Still, ICRA expects majority companies in its sample to report “healthy revenue growth in FY22 as well as FY23”.
Other Key Highlights
Major players focus on high-value contracts and diversifying of product basket and geographies to reduce lumpiness in revenue.
Original Equipment Makers
Lower working capital intensity and relatively higher margin allow them to remain net debt-free and cash rich.
Working capital intensity displayed a consistent improvement in the past five years as against the EPC sample.
In the current fiscal, the contraction in margin for OEMs was lower than EPC companies amid contracting operational margins.
Engineering, Procurement And Construction
Relatively higher working capital intensity due to funds blocked as retention money, and comparatively lower operating margin.
Carry debt in their books, resulting in moderated leverage and coverage ratios.
Due to greater contraction in margin in the recent past, these companies remain more vulnerable to changes in input prices and time and cost overruns.
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