Capital goods & engineering companies may record flat profit growth in Q4

Despite price hikes and operating leverage, some companies may witness contraction in margin due to low profitability in certain business segments.

With March quarter generally being the best period of the year for execution of projects, most infrastructure, capital goods and engineering companies are seen reporting strong order inflows with healthy execution in the fourth quarter (Q4) of financial year 2022-23 (FY23).

On a year-on-year (YoY) basis, the profitability of capital goods companies is expected to be flat, but softening commodity prices and operating leverage could lead to an improvement sequentially. The pack could witness moderate growth in net profit on a yearly basis, most analysts believe.

“The capital goods universe is expected to witness moderate PAT growth of around 6 percent YoY, as companies such as BEL, HAL, KEC, and V-Guard are likely to witness tepid profitability on YoY basis,” said Sharekhan by BNP Paribas.

Kotak Institutional Equities sees healthy execution for all capital goods companies and most engineering, procurement and construction (EPC) companies led by strong order book accretion in the past five to six quarters and expects recent moderation in commodity prices benefitting the earnings before interest, taxes, depreciation and amortisation (EBITDA) margin.

Meanwhile, Prabhudas Lilladher believes strong opening order books, continued execution momentum and better demand or orders from domestic as well as key export markets, such as the Middle East, Americas, SAARC, and Africa, among others, will bode well for capital goods companies during the March quarter.

“We expect our capital goods coverage universe to report 12.5 percent YoY and 31.3 percent QoQ revenue growth, as Q4 is typically the best quarter for project-based companies. We expect project-based companies to report around 13 percent YoY revenue growth, given lifetime high order book of all the companies under our coverage,” Sharekhan added.

The brokerage firm believes Larsen & Toubro (L&T) will post approximately 14 percent YoY growth in revenue and about 17 percent YoY growth in net profit, while its operating margin is expected to come in at 12 percent, down 39 basis points (bps) YoY and up 101 bps quarter-on-quarter (QoQ).

Meanwhile, L&T announced EPC orders in the range of Rs 20,000-31,500 crore, across railway, hydrocarbon, power transmission & distribution, water treatment, heavy engineering, and buildings & factories, highlighted ICICI Securities.

Despite price hikes and operating leverage, some companies, such as L&T and KEC International may witness a contraction in margin due to low profitability in certain business segments or orders, while net profit growth could be moderate, as companies like HAL and BEL may witness moderation in margins on account of the execution of manufacturing orders. Further, higher interest costs may restrict KEC International’s profit after tax (PAT) growth, the domestic brokerage firm added.

Overall, EPC companies like L&T, KEC, BEL and Cochin Shipyard are expected to remain focused on working capital and cash flow management amid better execution and emphasise on receivables collections. Companies with stronger balance sheets and cash flows are well-placed to gain the most from a gradual economic recovery, ICICI Securities said, adding that product-oriented companies like SKF India, ABB India, Elgi Equipment, and AIA Engineering, which have strong balance sheets, zero debt and healthy cash balances are likely to benefit as demand gradually returns to normal.

Besides, Siemens and ABB India’s Q4 revenues may surge 18 percent and 15 percent, respectively, on higher orderbook. Revenue during the March quarter for KEI Industries may surge 9 percent YoY amid continued momentum in infra and realty projects, and growth in the retail business pointed out Elara Securities.

Analysts have pointed out that the management commentary by companies on order pipeline, margin trajectory and exports would be keenly monitored.