As companies gradually recover from the adverse impact of the COVID-induced disruptions, investors are closely tracking the return to normalcy. Here, a comparison with performance during the pre-pandemic times becomes a key measure.
In this backdrop, how are capital goods, infrastructure and defence companies faring? Emkay Global Financial Services studied the performance of around 35 companies in the given sectors and evaluated where they stand currently vis-à-vis pre-COVID times. This is on the basis of performance for the half year ending September (H1FY22) on sales trajectory, profit after tax (PAT) growth and margin movements year-on-year as well as on two-year CAGR basis. CAGR is the compounded annual growth rate.
Here are the findings.
How things stack up
“Infrastructure companies (2-year sales CAGR of 4 percent) fared better than defence/ capital goods (1 percent/ -3 percent) companies on the sales front,” said Emkay’s analysts in a report on November 26.
Although, capital goods firms have done better on the profitability front. “At the PAT level, capital goods companies matched their H1FY20 profitability, but infrastructure/ defence saw a negative 11 percent/ 7 percent two-year CAGR,” said the brokerage firm.
The comparatively subdued show of infrastructure/ defence companies on profitability can be largely attributed to the impact on margins in various segments. Unsurprisingly, higher commodity costs weighed heavily on gross margins with infrastructure and defence companies getting more hurt.
For the three sectors, aggregate gross margin was down 290 basis points (bps) year-on-year (2-year CAGR negative 180bps) for Emkay’s universe. One basis points is one-hundredth of a percentage point. “However, with strict cost control on staff and other expenses, EBITDA margin was only down by 64bps on a 2-year basis,” points out the brokerage.
EBITDA is earnings before interest, tax, depreciation and amortization; it is a key profitability metric for companies.
As such, commodity price movement remains key moniterable in the coming days.
The order book at the end of H1FY22 saw a 2-year CAGR of about 6 percent for Emkay’s coverage universe. Infrastructure companies stood out with a 14 percent CAGR, mainly buoyed by road orders. Here, JMC Projects (38 percent), Ashoka Buildcon (26 percent) and HAL (19 percent) were the clear winners in terms of order book growth. On the other hand, KNR, PNC, HR Infra, Thermax and Triveni Turbine fared well. The laggards were Cochin Shipyard, Mishra Dhatu, Apar and Kalpataru Power.
Awards and tenderingDuring April-October 2021, tenders for all sectors/ all sectors excluding roads saw a 2-year CAGR of 35 percent/ 32 percent, while awards saw only a 20 percent/ 7 percent CAGR. It is worth noting here that even though tender pipeline is robust, awards are lagging. Secondly, road is clearly driving awards currently, along with railways and water supply.