INSUBCONTINENT EXCLUSIVE:
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.
