Capital goods sector toplines under stress on cash flow woes
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While the move dented the topline of the state-owned equipment firm during the quarter ended September 30, executives from the company say this sort of action is warranted to secure the long-term interests of the company. "The step has worked with some customers, who have quickly organised their finances to make payments to us," a BHEL executive said. With power project developers struggling with cash flow problems and the sustained slowdown in investments dampening demand from industrial business segments such as cement, paper and metallurgical industries, players in the capital goods sector — considered a proxy for investment sentiment — are less than upbeat about the prospects in the coming quarters.
"In general, order finalisations have slowed down. Cash flow problems have badly hit power sector customers. In the industrial sector like mechanical and electrical products that include motors, transformers, compressors and valves, which typically has shorter cycle time, orders have come down as new capacities are simply not getting added due to the slowdown in the industry." BHEL's 'other income' component too has fallen sharply during the September quarter, with advances coming in at the time of new order bookings drying up.
Private sector engineering major Larsen & Toubro too has been faced with a weakening of order inflows in the power equipment space, even though the company managed to more than compensate for this by redoubling focus on the other infrastructure areas such as urban infrastructure and water segments. The company reported a 30 per cent growth in its order book in the September quarter, aided by strong execution and a surge in infrastructure sector orders amid weak power equipment and export order inflows.
The capital goods sector's credit quality has come under strain, with working capital requirements surging to a five-year high. According to a recent Crisil report based on a study of 50 capital goods entities involved in equipment manufacturing and construction, the pressure on this sector is primarily due to the deferment of large capital investment plans since fiscal year 2011-12 by several end users.
The resultant build-up in inventory and delay in release of payments by customers has led to a tight liquidity. The weakening credit risk profile of these entities gains significance as the capital goods sector acts as a lead indicator, signaling increased pressure on other sectors as well as for the economy as a whole.
According to an Emkay Global Financial Services report, the number of published tenders in August declined 10 per cent month-on-month, registering the second consecutive monthly decline, largely on account of lower demand for high-value capital goods such as power transformers and construction equipment.