Q1 results preview: Strong order book booster for infra, cap goods firms

Sequentially, numbers likely to decline, since June quarter is seasonally weak

The government’s capital expenditure (capex) outlay is expected to aid year-on-year (YoY) top line and bottom line growth of infrastructure and capital goods companies in the first quarter (Q1) of the current financial year (2022-23).

Sequentially, however, numbers on both fronts are likely to be down since Q1 is a seasonally weak quarter for these firms.

Sector analysts expect 18.4 per cent revenue growth and nearly 70 per cent profit after tax (PAT) growth on a YoY basis for these companies, which includes names like Larsen & Toubro (L&T), Thermax, ABB, and KEC International, according to the data compiled by BS Research Bureau.

Quarter-on-quarter, both revenue and PAT growth may decline 40.8 per cent and 66.4 per cent each for players within this universe, as margins remain under pressure due to rupee depreciation and partial recovery of commodity inflation.

A weak rupee increases the landed cost of imported goods, which also gives domestic manufacturers of such goods leeway to raise prices. While global prices of oil and metals have been cooling off of late on account of recession fears, these gains will be offset, say experts, against currency volatility as interest costs will increase for companies.

Companies have responded to commodity and currency risk by putting in place inward and outward covers, as well as factoring in price variance (PV) clauses in their contracts.

“Many of our contracts have a PV clause. Some don’t, resulting in some impact on margins when commodity prices fluctuate. Overall, we have to strike a balance, ensure all contracts have a PV clause, renegotiate when the price increases are more than the PV clause, and hedge for commodity risk,” S N Subrahmanyan, managing director (MD) & chief executive officer (CEO), L&T, said in a recent press conference.

Despite challenges, analysts and players maintain that order enquiries and inflows have been strong in Q1, adding that the government’s continued thrust on infrastructure development and pick-up seen in private capex activity after two years of Covid-19 has aided momentum.

Of course, January-March quarter of 2021-22 remains the strongest period for these players since order inflows tend to be high in the period. 

“Sectors like data centres, Metro projects, power transmission and distribution, and mining continue to witness strong traction in India,” Hitesh Jain, Hemant Nahata, and Keval Shah, analysts at YES Securities, said in their Q1 preview of the infrastructure and capital goods sector.

“On the export front, ordering and enquiries remain strong from geographies such as West Asia, Africa, the US, Europe, and the South Asian regions,” said analysts.

Firms have hinted at the same, saying their order inflows from India and markets such as West Asia, have tracked well between April and June this year. KEC International, for instance, recently said it had received orders worth Rs 1,147 crore from diverse segments, including railways, power transmission and distribution, hydrocarbons, cables, wires, and data centres.

Vimal Kejriwal, MD and CEO, KEC International, says, “The new orders reinforce our belief that there is an improvement in the capex cycle, at least for now. We are seeing a gradual uptick in the railway order intake, for instance. Diverse orders in the civil business, in the residential and industrial segments, such as hydrocarbons and data centres, strengthens our portfolio diversification and reaffirms our confidence in the growth of this vertical.”

L&T, on the other hand, has announced engineering, procurement and construction orders to the tune of Rs 7,000-15,000 crore in Q1, said analysts at ICICI Direct.

On Monday, the company added more projects to this list, saying it had secured ‘significant orders’ in its building and factories’ vertical. This included constructing data centres of a total capacity of 10.8 megawatt at Mumbai and Navi Mumbai.

“While order inflows have remained strong in Q1, key risks for infrastructure and capital goods players include projects deferrals and delays,” Chirag Shah, Vijay Goel, Ameya Mahurkar, and Yash Panwar, analysts at ICICI Direct, said in their Q1 preview of the sector.

Some experts have also pointed to the challenges emanating from an increase in the cost of capital for infrastructure and capital goods firms due to sustained interest-rate hikes.

“The overall interest rate cycle has only been picking up as the Reserve Bank of India looks to tackle inflation,” says M S Unnikrishnan, capital goods veteran and former MD of Thermax, adding, “This is a near-term concern.”