After an outperformance in Q2FY2009, the Capital Goods sector underperformed the broader markets in Q3FY2009 amidst growing concerns of slowdown in order inflows and liquidity crunch. The Q3 saw the capital goods index underperform the benchmark index as the BSE Capital Goods index declined by 34.8% as against a 26.1% decline witnessed by BSE Sensex. The capital goods index in the monthly index of industrial production numbers continued to be volatile, as it rose by 3.1% in October 2008. The base effect would continue to have an impact for the coming couple of months due to high base of November 2007 (24.2%) and December 2007 (17.6%).
The heavyweights (within this sector) continued to impress in terms of order inflows with L&T and BHEL reporting a number of order wins during the quarter. The management of L&T has yet again reiterated its view of achieving a 30% order inflow for the current fiscal. The companies relying on private capex will continue to face greater pressure, as corporates cut down their capex plans amidst the slowdown, while companies such as BHEL, which are primarily relying on public spend, are not likely to see much slowdown in their order inflows.
The growth in the current year would still continue to be driven by the existing strong order book position for most of the companies, particularly those for mid-sized and smaller companies. Key raw material prices eased significantly during the quarter, with the base metal prices currently trading at multi-year lows. However, the impact of the same is unlikely to be felt in the current quarter, as the bulk of the raw material booking for the orders executed during the present quarter had been done earlier at higher prices. Hence, the impact of softening prices would only be felt with a lag of couple of quarters.
Lack of funding, delays in execution and further cuts in the private capex remain primary concerns for the sector and future performance of the companies. In fact, a number of infrastructure projects are getting delayed on account of funding constraints or funding gap. Though the government has reacted well, offering a number of measures to facilitate infrastructure funding through its stimulus packages, the risks still loom large over the industry. For the quarter ended December 31, 2008, most of the companies in this sector would report a top line growth of around 23% and a bottom line growth of around 14%. My personal favourites are BHEL, Crompton Greaves and Genus Power Infrastructures.
