Slowdown in capital goods sector

By Ramnath Subbu

MUMBAI, JULY 1. The performance of the capital goods sector is considered a leading macro-economic indicator and reflecting the slowdown in the economy since the second half of 1999-2000, the domestic capital goods sector has shown distinctive signs of a slowdown.

According to a report `Economy Update' by Fitch Ratings India, reflecting lack of business confidence, ``the performance of the whole sector during 2000-01 was wholly disappointing. It did not show double-digit growth even for a single month. In fact, other than April 2000, the maximum growth recorded during a month was 3.61 per cent in September 2000. The second half of the fiscal experienced mostly negative growth. The overall growth during the period was a mere 1.4 per cent vis-a-vis 6.9 per cent recorded in 1999-2000.''

In the case of capital goods imports, quoting Centre for Monitoring Indian Economy (CMIE) figures, the report says they were negative in eight out of the first ten months barring November 2000 and January 2001 when it registered a growth of 8.26 per cent and 9.7 per cent respectively.

The capital goods sector can be divided into non-electrical and electrical. The non-electrical machinery segment is cyclical in nature and its prospects hinge directly on industrial investment. Electrical machinery is an exception to this as its fortunes are tied almost wholly to the power sector.

In the non-electrical segment, machine tools, textile machinery, compressors and drilling equipment, diesel engines and general industrial machinery are the main categories.

The profit margins in the industry are by and large, driven by access to technology and global markets, the ability to identify niche areas, efficient inventory and debt management, good after- sales services, ability to offer solutions rather than products, and product innovation and range.

Mr. Kunal Kundu, research analyst, Fitch Ratings India, said, ``The capital goods sector depends on the infrastructure and for the next couple of months, things look doubtful as the confidence is on the lower side. The sector is after all, the lead indicator of the economy.''

Bharat Heavy Electricals (BHEL), in spite of the lull in the economy, has managed to bag large domestic and export orders. For the year 2000-01, the company registered significantly lower sales of Rs. 6,322.93 crores (Rs. 6,844.14 crores) and a lower net profit of Rs. 305.99 crores (Rs. 599.44 crores).

Besides being a global player in terms of its size, it is present in both power and industry machinery segments. The company's prospects are linked largely to the heavy engineering industry and this being sensitive to the state of the economy, there are possibilities of a negative fallout on the profitability.

Asea Brown Boveri (ABB) has announced a net profit of Rs. 54.01 crores for the year ended December 2000 against Rs. 37.19 crores in the previous year. The company has announced a dividend of 50 per cent. Net sales for the year were Rs. 793.27 crores (Rs. 775.80 crores) and other income was Rs. 13.57 crores (Rs. 17.55 crores).

Mr. K. K. Kaura, managing director, ABB, while announcing the results at a press briefing, had said that while about 12-13 per cent of ABB's revenues come from services, the main revenues are 40-45 per cent from its power transmission and distribution business, 40-45 per cent from business automation and the balance from its building systems and technology business.

For the current year, Mr. Kaura said the topline growth would improve given that the order book position was better than the past year we could at least maintain it.

The company's growth strategy includes strategic marketing focus, providing value added solutions, managing for value and people development.

Larsen & Toubro (L&T) has announced a net profit of Rs. 315.06 crores for the year 2000-01 against Rs. 341.63 crores in the previous year. Its net sales were Rs. 7,825.43 crores (Rs. 7,423.81 crores).

The company has launched several initiatives to expand reach, one such being thrust on export market development. Already there are some orders for its E&C business from West Asia, Sri Lanka and Europe. Export earnings have more than doubled to Rs. 724 crores (Rs. 316 crores).

There has been some re-organisation of business in the industry. Last year, Atlas Copco (India) and Chicago Pneumatic India (CPIL) were merged. The rationale behind the merger was to create a simpler legal structure for the companies in India and to strengthen their competitive position.

Atlas Copco assembles screw compressors and manufactures construction tools, rock drills and mechanised drill rigs. CPIL manufactures /assembles industrial and construction tools, reciprocating compressors, tools and assembly of screw compressors.

Thermax and Cummins Diesel Sales and Service (I) (CDSS) have entered into a strategic alliance to provide attractive energy solutions across various industry segments.

The agreement will see significant value-additions being offered to the industry. CDSS will, under the agreement, market Thermax's exhaust gas boilers and vapour absorption machines along with their range of diesel gensets. Thermax will provide pre-sales and post-sales services including training of customer personnel for the optimum use of the integrated systems.

Among the multinationals in India, the parent of Siemens which hold 51 per cent of the equity of the Indian arm, has announced its intentions to pick up an additional 25 per cent of the equity from the open market. Siemens' achieved a sales of Rs. 527.18 crores in the half year ended March 2001 against Rs. 500.05 crores and a net profit of Rs. 38.59 crores (Rs. 33.77 crores).

Alfa Laval International AB, the Swedish parent of Alfa Laval India which owns 51 per cent of the equity in the Indian arm, has initiated a public offer to purchase an additional 25 per cent of the shares.

According to a company release, the intention of the offer is to achieve control of Alfa Laval India ``to prepare for future development and growth of Alfa Laval India and the Alfa Laval group.''

``Overall'', according to Mr. Kundu, of Fitch Ratings, ``there is no capacity creation in the sector and de-bottlenecking is taking place. The sector should pick up as a lot of negative information has been filtered out. The economy is now suffering from supply- side constraints and lack of infrastructure is largely to blame for this. In almost all the core sectors, there is scope for growth. Investments have been postponed in too many sectors but for how long?''

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