Smaller capital goods players offer respite

Smaller engineering companies seem to have stood out in August, despite order activity falling 51 per cent to Rs 8,400 crore. This performance stands in contrast to July, when orders awarded crossed Rs 40,000 crore.

Analysts say that as power equipment and railways continued to command a lion's share in recent tenders (40-45 per cent) and with many other sectors showing weakness in terms of order momentum, a secular improvement of order inflows for engineering companies may still be a few quarters away.

AIA Engineering, Engineers India, Lakshmi Machine Works (LMW) and SKF India that have a focus on niche segments performed well. However, return of capital expenditure (or capex) and improvement in utilisation rate in sectors such mining, construction, power, cement, textiles and railways will be key earnings drivers.

AIA Engineering

AIA is the second largest high-chrome casting producer in the world in terms of capacity and manufactures grinding media, liners and diaphragms, collectively known as mill internals. These are used for crushing in the cement, power utility and mining sectors. Half of AIA's volumes are from iron ore, platinum, gold and copper miners and over three-fourth are from exports (spread over 120 nations) and reports suggest these industries are at the cusp of replacement driven capex.

This will help AIA optimise production capacity of 340,000 tonnes and eventually help absorb the additional 120,000 tonnes of production facilities that will come on stream in the next three years. With this, AIA has the potential to become the world's largest player in high-chrome products. With June quarter (Q1) consolidated margins at 35.6 per cent, a pickup in revenues will drive earnings. AIA has provided guidance for 14 per cent volume growth in FY17, which has led analysts at Edelweiss to revise their FY17 and FY18 earnings target by seven and 12 per cent, respectively.

Engineers India

Improving capex in the oil and gas space is the major revenue trigger for Engineers India, a total solutions provider - from engineering consultancy to EPC (engineering, procurement, and construction). Analysts say as oil companies gear up for modernising their plants to produce higher quality fuels, order inflow for companies like Engineers India will pick up.

While the primary focus for the company is the oil and gas and petrochemicals sectors, it has also diversified into infrastructure, water and waste management, solar and nuclear power and fertilisers segments. On expectation of orders from Hindustan Petroleum Corporation and Namami Ganga (Centre's initiative to clean Ganga river), management has revised order inflow guidance upwards for FY17 by Rs 1,500 crore to Rs 3,500 crore. Following this, analysts at Prabhudas Lilladher have increased FY17 earnings estimates by 13 per cent.

SKF India

With 28 per cent market share in the bearings industry, SKF India's traction in revenue growth kicked off in FY16, thanks to improving demand from the automobile sector, which accounted for 40 per cent of revenues.

But, the pickup in its industrials , which showed promise in Q1, will be the next revenue booster. While auto segment revenues were flat in Q1, 13 per cent growth in industrials revenue helped SKF expand its top-line by seven per cent and net profit by 30 per cent in Q1.

The industrials segment comprises railways, power utilities and road construction equipment. These are also seeing an improvement in investment climate and, hence, analysts at Antique Stock Broking expect SFK to post 12 per cent compound annual growth between FY16-18.

LMW

When the end-user industry faces a slowdown, it has a cascading effect on suppliers. But, LMW has defied this and has an order book of Rs 2,420 crore, providing it a year's earnings revenue visibility.

This is noteworthy for a sector where order book visibility is thin. In Q1, LMW increased market share in the domestic textiles industry to 64 per cent from 61 per cent in March.

Focus on quality and product upgrades are key strengths, and helped LMW gain 14 per cent market share in the global industry, apart from enjoying 12-13 per cent pricing premium compared to European peers. Analysts at Nirmal Bang expect LMW to post around nine per cent revenue and net profit growth in FY17.

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