Revenues of engineering and capital goods cos seen up 15-17%

Revenues of engineering and capital goods cos seen up 15-17%

Government investment in infrastructure, including increased budgetary allocation, and economic recovery will boost engineering and capital goods companies revenues by 15-17% this fiscal year, more than compensating for last fiscal's 3% decline.

This, together with improved coverage of fixed expenses, results in a 50 basis point (bps) increase in operating margins. Increases in the prices of raw materials are passed on with a lag.

While working capital requirements will increase, increased cash generation and judicious capital expenditure (capex) will maintain credit profiles 'stable,' according to a CRISIL Ratings analysis of 42 firms with aggregate revenue of Rs 1.30 lakh crore, or around 55% of the sector's revenue.

According to Anuj Sethi, Senior Director of CRISIL Ratings, "engineering and capital goods businesses' order books remain solid at Rs 2.3 lakh crore" (1.7 times of fiscal 2021 revenue). Orders from industrials, infrastructure, railways, construction, and mining equipment are increasing, but those from power and heavy electrical equipment remain slow. In aggregate, a resumption of execution following the second wave should sustain revenue growth this fiscal year.”

Additionally, this fiscal year's 26% rise in budgetary funding for infrastructure bodies well for order flows.

To support the infrastructure push, private sector makers of cement, steel, and non-ferrous metals have already pledged greater capex, which will help engineering and capital goods companies improve their income. Another boost would come with the commencement of private sector investing in other areas, including to take advantage of the production-linked incentive scheme's benefits.

Operating margins are expected to increase by 50 basis points to 10% this fiscal year, aided by fewer severe lockdowns (compared to last fiscal) and improved operating leverage. Lagged pass-through of increased raw material prices, particularly metals prices, will also be beneficial.

According to Tanvi Shah, Associate Director of CRISIL Ratings, "working capital borrowings are projected to increase in lockstep with increased revenue." Nonetheless, the benefit of increased cash generation and lower capital expenditures (due to adequate capacity headroom) will sustain credit profiles. The debt/earnings before interest, taxes, depreciation, and amortisation (Ebitda) and interest coverage ratios of players are predicted to rise to 1.8 times and more than 6.5 times, respectively, this fiscal, from more than 2 times and 5 times last fiscal.”

Having said that, the rate of investment recovery, the ability to manage working capital, and the potential impact of a third wave of the Covid-19 pandemic are all worth monitoring.