Capital goods: Delay in execution of projects a cause for concern

The second quarter of FY12 has come to a close, but there is hardly any improvement in prospects for the capital goods sector hit hard, due to a slowdown for nearly two years now. The IIP index for capital goods is down by nearly 38% since March this year and the valuations for the industry is down by almost 40% today vis-a-vis a year ago. The industry currently trades at a P/E multiple of 20.

While absence of adequate number of new orders is a big concern for the industry, a even greater concern is that of execution of existing projects in hand. Execution bottlenecks have already impacted the margins of the some of the bigger players such as L&T in the first quarter of the current financial year. It should therefore be no surprise to see these delays squeezing the margins of the other bigger players in the industry as well, which will be reflected in the second quarter results.

Many of these execution delays are in fact an outcome of the government's lack of focus on issues such as coal linkage, environment clearances and land acquisitions that have stalled or delayed projects in power and infrastructure sectors. Moreover, the absence of reasonable funding options, given high interest rates in the economy, has compelled many of the independent power producers (IPP) to put on hold their investments in the projects, thereby directly impacting sales growth and order book positions of companies.

Even as these execution delays are likely to haunt industry for some more time fresh orders may help boost the industry.