Capital goods majors L&T and BHEL faced the heat on the bourses on Monday as a slowing economy clouded the outlook for these companies.
Engineering and construction major L&T fell by the sharpest margin in nearly four years after the company reported a steep fall in net income during market hours on Monday. L&T plunged 7.4% to close at R901.9 on the BSE. The companys net income for the quarter ended June stood at R756 crore against R863 crore reported in the year-ago period,a fall of 12.5%.
State-owned engineering firm BHEL,the second largest capital goods firm by market capitalisation (m-cap) after L&T,fell 7.05% to close at R161.50 and touched its 52-week low of R160.5 during intraday trade. The stock had fallen about 8% last Friday as well and has shed about 14% in the last two sessions.
The BSE Capital Goods index was the worst performing sectoral index on Monday as it dived 5.57%.
According to analysts tracking the sector,BHEL is likely to face strong headwinds as its order book is oriented towards PSUs,especially the power sector. Nearly 80% of BHELs order book comprises power sector,which itself is under stress. In recent times,the pace of orders has also slowed down for BHEL. In FY12,the company received R60,000 crore in order inflows,while in FY13,the number was about R30,000 crore, said Chirag Shah,AVP (research),ICICI Direct.
L&T,on the other hand,seems better placed. L&T is better placed as it has a diversified order book, added Shah. During the June quarter,the company received 53% orders from the private sector and 35% from the public sector. The engineering companys debt stood at R11,000 crore.
In the year-to-date,L&T has slipped more than 16%,while BHEL has lost more than 30%. The BSE Capital Goods index has declined 20%.
Market experts feel that while BHELs valuations are at historical lows,the lack of industrial activity has rendered the stock unattractive in the near term. The stock is trading at 10x (times) one-year forward P/E. L&T,meantime,is trading at 14x (times) one-year forward P/E.
Once industrial activity picks up and the index of industrial production (IIP) and gross domestic product (GDP) numbers start improving,the capital goods companies would see a turnaround. The P/E multiple will also improve, said Anand Bagaria,senior research analyst,Finquest Securities.