Revenues Of Engineering, Capital Goods Companies Seen Up 15-17%: Report

While working capital requirements will increase, higher cash generation and prudent capital expenditure (capex) will keep credit profiles stable, shows a Crisil Ratings analysis

Revenues Of Engineering, Capital Goods Companies Seen Up 15-17%: Report

Increases in raw material prices are being passed on with a lag.

The government's thrust on infrastructure with higher budgetary allocation and economic recovery will lift the revenues of engineering and capital goods companies by 15 to 17 per cent this fiscal, more than making up for a 3 per cent contraction last fiscal.

Besides, better coverage of fixed costs will lead to a 50 basis points (bps) improvement in the operating margins, according to Crisil Ratings. Increases in raw material prices are being passed on with a lag.

While working capital requirements will increase, higher cash generation and prudent capital expenditure (capex) will keep credit profiles stable, shows a Crisil Ratings analysis of 42 companies with aggregate revenue of Rs 1.30 lakh crore and accounting for about 55 per cent of the sector's revenue.

Anuj Sethi, Senior Director at Crisil Ratings, said the order book of engineering and capital goods companies remains healthy at Rs 2.3 lakh crore (1.7 times of fiscal 2021 revenue).

"Orders from sectors such as industrials, infrastructure, railways, construction and mining equipment are rising while those from the power and heavy electrical sectors remain sluggish. Net-net, a pick-up in execution after the second wave should support revenue growth this fiscal.

"Also, a 26 per cent increase in budgetary allocation for infrastructure this fiscal bodes well for order flows.To support the infrastructure driven thrust, private sector producers of cement, steel and non-ferrous metal have already announced increased capex which too will support the revenue growth of engineering and capital goods players.

Another fillip will come by when private sector spending in other sectors, including to avail of the benefits of the production-linked incentive scheme, starts.

Operating margins are seen rising 50 basis points to 10 per cent this fiscal, supported by less-severe lockdowns (versus what happened last fiscal) and better operating leverage. Lagged pass-through of rising raw material prices -- especially metals -- will come in handy as well.

Tanvi Shah, Associate Director at Crisil Ratings, said working capital borrowings are likely to rise in line with higher revenues. Nevertheless, the rub-off of better cash generation and moderate capex (because of sufficient capacity headroom) will support credit profiles.

The debt/ earnings before interest, tax, depreciation and amortisation (EBITDA) and interest coverage ratios of players are expected to improve to 1.8 times and over 6.5 times this fiscal compared with over two times and five times respectively last fiscal.

However, said Crisil, the pace of pick-up in investment cycle, ability to manage working capital and possible impact of a third wave of Covid-19 pandemic will bear watching.