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Signs of revival in capital goods sector

The year FY18 began with GST related disruption for the sector. The H1FY18 sales were impacted due to unavailability of input credit on materials-in-transit, which prompted many private sector customers to defer supplies. The order book for the sector was up 4% yoy to Rs3,30,000cr (including top 6-8 companies) providing visibility of over three years. Sectors such as power transmission, railways and infrastructure witnessed strong order inflows. Order inflow growth was led by companies like Thermax (Rs4,221cr (up 55% yoy) – driven by private orders), KEC International (Rs11,300cr (up 31% yoy) – T&D orders from India and overseas) and ABB (Rs9,490cr (up 18.6% yoy) – open related and automation orders).

The capacity utilization so far in the sector has remained stagnant at 70% over last year. However, green shoots were visible in Oil & Gas, Cement and Steel sectors. Inquiries from consumption sectors (Auto, FMCG, Consumer Durables) as well as Pharma increased in the last quarter. Performance in the international markets was a mixed bag. Despite tepid revenue growth, inflows and enquiries from South East Asia, Europe, USA and Africa increased during the year. The rise in material cost (steel, copper, etc) had a marginal impact on the profitability of the companies. However, companies like BHEL, Thermax having long gestation period orders, which include material cost pass-through clauses did not face major impact. In FY18, interest built up for flue gas desulphurization (FGD) systems orders to be awarded by state utilities in Maharashtra, Rajasthan, Madhya Pradesh and Uttar Pradesh. These orders have an opportunity of ~25,000 MW and expect to be awarded in FY19E.