Cap goods-Interest costs to continue to mar PAT:ICICIdirect

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26 Aug, 2025 12:21

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ICICIdirect.com's report on capital goods sector

"We estimate the interest costs for our coverage companies will rise 18.5 percent for our coverage universe in Q1FY14E, as a stretched working capital cycle has led to higher short-term loans. Coupled with this, a tepid execution cycle has aggravated negative financial leverage for coverage companies. The above is reiterated by the fact that the interest/EBITDA ratio is expected to reach 18.1 percent in Q1FY14E, a record low. The interest/EBITDA ratio has significantly deteriorated from FY11, FY12, FY13 levels of 6.6 percent, 7.6 percent, 10.8 percent, respectively. The deterioration mainly comes from the weak capex cycle prevailing in the economic since FY11. This has translated into vicious cycles of lower order inflows, heightened competitive intensity, declining margins, stretched working capital and increasing debts to finance sticky receivables."

"The current macroeconomic backdrop (high CAD, volatile currency depreciation and resultant inflationary expectation) will restrict the RBI from further loosening up interest rates in FY14. We believe this will accentuate problems for capital goods companies under our coverage. This, we believe, will keep interest costs elevated and delay any recovery from the anticipated monetary loosening earlier. Hence, we have tried to capture the above risks by cutting our target multiple and revising the target prices of Jyoti (Rs 28 from Rs 25), KEC (from Rs 48 to Rs 37), BGR (from Rs 211 to Rs 161) and McNally (Rs 84 to Rs 56)," says ICICIdirect.com research report.

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