Commentary from the capital goods space over the couple of years has been more than cautious and that’s not surprising since with companies in no hurry to add capacity, order flows at the country’s engineering firms have been thin. Larsen & Toubro (L&T) CFO R Shankar Raman has said on more than one occasion that the private sector appeared to have taken a breather from investing. “Projects are being awarded at a much slower pace than in the 2008-10 period and decision making on capex is laboured,” he said after the firm reported an ordinary set of numbers for Q1FY15.
While a new government at the Centre could well convince corporates to move ahead with their growth plans, there are few signs this is happening. ICICI Bank CEO Chanda Kochhar’s observation after the bank reported results for the three months to June that credit demand for new projects is still a few quarters away pretty much sums up the situation; with corporate loans at the country’s second largest lender having increased by just 8% year-on-year in the three months to June, it’s evident demand is dull. Indeed, capacity utilisation in the economy is estimated at just around 70%, which implies there’s room for more production before new capacities are needed. Revenues at BHEL dropped 20% y-o-y in the June quarter, a sign of how weak demand is. At rival Siemens, sales were down 10% y-o-y while at the Pune-based Thermax, they came off 3% y-o-y. MS Unnikrishnan, MD and CEO, Thermax, says the capital goods industry can’t hope for a quick turnaround.
One reason or this could be that companies are deliberately delaying the execution of projects, since once these are commissioned they would need to start repaying loans. “The underlying cash flows of those projects may not be sufficient to support such loan repayments,” Kotak Institutional equities wrote in a report.