Government thrust on infrastructure, including higher through budgetary allocation, and economic recovery will lift the revenues of the engineering and capital goods companies¹ by 15-17% this fiscal, more than making up for a 3% contraction last fiscal.

That and better coverage of fixed costs will lead to a 50 basis points (bps) improvement in the operating margins. 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’, a CRISIL Ratings analysis of 42 companies, with aggregate revenue of Rs 1.30 lakh crore and accounting for about 55% of the sector’s revenue, shows.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “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% 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 would come by when private sector spending in other sectors, including to avail of the benefits of the production-linked incentive scheme, commences.

Operating margins are seen rising 50 basis points to ~10% 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.

Says Tanvi Shah, Associate Director, CRISIL Ratings, “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 2 times and ~5 times, respectively, last fiscal.”

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

¹ Capital goods comprise equipment suppliers and EPC companies in infrastructure segments (excluding roads)