L&T’s orders rise but the outlook is still a bit hazy
It is prudent Larsen & Toubro’s management has decided not to include some R17,000 crore worth of orders as part of its orderbook which it reckons might not be executed. Though L&T’s Q4 orders are up 32% year-on-year, outstanding orders at the end of March 2013 were just 5.5% higher than those at the end of March 2012. It is bad news for economy watchers because it is a sign of how companies are not going ahead with new projects or are not able to complete them. Trends relating to capital expenditure have been depressing for quite some time now and don’t seem to be getting better; the order backlog at engineering firm BHEL, for instance, was smaller at the end of FY13 than it was a year before. CMIE data shows project completions were down year-on-year at the end of March 2013, while new project starts fell 57% year-on-year in the infrastructure and industry spaces, the lowest since June 2005. Much of the capital goods industry’s woes have been reflected in the IIP data which showed a contraction for the segment in nine of the last 12 months. Indeed, even if L&T managed to win a good many orders last year, a fair share was for projects overseas and the management indicated on Wednesday, the share of overseas orders might be significantly higher this year.
While that will not make too much of a difference to L&T, what it means is that the capex cycle back home is not turning for a variety of reasons including clearances being delayed and there is lack of clarity in policy on the supply of raw materials—whether coal, gas or iron ore. The delay in the coal-pool pricing mechanism, for instance, has left industry less confident while high interest rates have made investing more expensive. India Inc remains badly over-leveraged and is not in a position to take on too many new projects—indeed, many are looking to sell even existing ones. Even those corporates that might have planned a venture or two would definitely want to revisit the idea, now that the slowdown has put a question mark on demand. Sales of commercial vehicles have fallen more than 15% in FY13 while manufacturers of two-wheelers are finding it hard to sustain volumes at FY12 levels and the story is similar for other discretionary products; the top line for a clutch of 850 companies has grown just 5% year-on-year in Q4 FY13 when inflation was running at 6%. With gross fixed capital formation, as a share of GDP, falling all the way from 32.4% in Q1 FY12 to 28.7% in Q3 FY13, the fear is we may not have hit the bottom of the capex cycle.