For those who believe the investment cycle may be bottoming out, the shape of order-books at the country’s engineering firms suggests it will be a while before capex troughs out. At BHEL, the order backlog at the end of the September quarter was R1.02 lakh crore, down 16.4% yoy; inflows in H1FY14 have dropped 49% yoy to just R4,500 crore. While smaller companies like Thermax, where new orders fell 29% yoy, are bearing the brunt of the slowdown in the economy, large firms like L&T seem to be banking on overseas markets for business—43% of L&T’s orders in Q2FY14 were sourced abroad. While there’s no doubt the sector is up against some stiff competition from Chinese players, the dearth of new projects and the increasing number of projects held up is clearly hurting.
Project announcements of R86,100 crore in Q2FY14, CMIE data shows, were way below the peak of R5,71,900 crore in Q4FY10, suggesting not too much capacity is being added. In its post-results commentary, the BHEL management highlighted the fact that delays in clearances and funding had meant execution was slowing; the company did not win a single major order from the power or the EPC sector.
With promoters not able to get clearances, bankers too have become wary of committing funds. A recent study by Kotak Institutional Equities points out that sanctions for fresh projects have fallen from R1,13,900 crore in Q1FY11 to R74,900 crore in Q1FY12, R41,300 crore in Q1FY13 and to just R22,000 crore in Q1FY14. Much of this can be seen from the sharp drop in the share of the private corporate sector in overall investment levels. There are, however, some strands of hope. For one, since around 45% of investments in the economy come from the unincorporated sector, this is investment that can turn around quickly—when export demand picks up, for instance. Second, while R12.6 lakh crore of investment projects remain stuck and are before the Cabinet Committee on Investments, over R3.7 lakh crore have been cleared, so this investment should start kicking in over the next few quarters. In areas like telecom, similarly, progressive policy announcements over the past few days have made the investment outlook more promising.