With GST-related issues being sorted out, execution of domestic projects is picking up. Motilal Oswal expects companies -- from its coverage universe -- to register 11 per cent revenue growth at the aggregate level. Industrials and engineering companies are likely to witness healthy revenue growth, backed by smooth execution of domestic projects, where GST-related billing issues have been sorted out. However, electrical consumer durables companies like Voltas and Blue Star could post muted revenue growth, with unseasonal rains impacting room air conditioner demand.
Margins to expand
Despite 11 per cent revenue growth for the entities concerned, aggregate operating profit is likely to grow 37.5 per cent year-on-year, led by better operating leverage, better revenue mix, and cost rationalisation over the last couple of years. Margin improvement at the sector level is commendable, given rising raw material costs and pricing pressure faced by the companies in an extremely competitive scenario. Net profit at the sector level is expected to grow 38 per cent YoY.
Capex cycle remains weak; general elections to curb government capex
The domestic private capex cycle has remained weak. Capex activity continues to be supported by government capex in the infrastructure segment. However, with the impending general elections, even government capex is likely to slow down, signs of which were evident in the recently released CMIE capex data. New project announcements dipped 22 per cent YoY to Rs 2.1 trillion in Q1FY19. Government projects declined 79 per cent YoY to Rs 244 billion (the lowest since FY05).
Though the near-term outlook remains subdued, Motilal Oswal notes that policy initiatives have been taken to (i) expedite regulatory approvals, and (ii) establish monetary conditions conducive to industrial revival over the medium term.
*Investment revival would be triggered by: (i) sustained recovery in consumption demand, and thus, capacity utilisation, and (ii) investment push by the public sector, leading to a virtuous cycle of cash flow generation.
*By initiating GST, labour and energy sector reforms, the government has partly addressed concerns about the pace and extent of reforms. Implementation of substantive reforms is essential for structured investment growth.
*Indian machinery exports have decelerated due to weak global demand, geopolitical concerns, and currency volatility across markets, among others. Also, volatile crude prices have had an adverse impact on global trade, and thus, investment demand. Project awards in the Middle-East have been muted.
Ordering activity supported by a select few sectors
*Overall ordering activity has started to see signs of pickup, driven by ordering from the steel, cement, fertilisers, and oil and gas sectors.
*Government awarding has been a pillar of support for industrial and engineering companies. Sector-wise, roads, railways, power T&D and defence registered strong tendering activity (fiscal allocations for roads/railways have increased).
Source: Motilal Oswal