The capital goods sector is expected to report strong revenue growth in the fourth quarter of FY10. The sudden ramp-up of project execution by frontli

The capital goods sector is expected to report strong revenue growth in the fourth quarter of FY10. The sudden ramp-up of project execution by frontline firms such Bharat Heavy Electricals Ltd (Bhel), ABB Ltd and Larsen and Toubro Ltd (L&T) will see revenue accretion at relatively high levels in these firms. According to analysts, capital goods companies are likely to see a 20-22% growth in revenues. This is encouraging, given that the sector registered a 3.5% growth in the third quarter. A major boost to execution has been the government’s increased infrastructure spending, especially in the power sector. This, coupled with easy liquidity in the system, helped companies execute projects at a faster pace. For example, Bhel, which has the largest presence in the power sector, has declared provisional revenue of Rs34,050 crore for the fiscal. This implies a 24-25% growth in the March quarter, against Rs10,800 crore in the year-ago period. L&T, another diversified infrastructure firm, is expected to report a similar growth rate. But some mid-size firms such as Thermax Ltd and Crompton Greaves Ltd will register muted revenue growth as the companies did not have a sufficiently large order book. Besides, most companies are likely to retain the third quarter operating profit margin of 15-17%. Despite these positives, the BSE Capital Goods Index registered a negative return of 0.3% during the March quarter, when the BSE Sensex returned around 0.4%. That’s probably because the sector had already run up at a much faster pace in earlier months following the elections, when the commitment to infrastructure growth was assured. And at the current market prices, valuations are rich. In most cases, fiscal 2011 earnings are already discounted at least 22 times, leaving little room for appreciation. How about the outlook for 2010-11? According to Mumbai-based Edelweiss Securities Ltd, “We believe given the pace of recovery in the economy, order inflows in FY11E could surprise on the upside. However, margins for FY11E may remain under pressure, as orders taken in FY09 reach the execution stage.”