Trudging along on the path to recovery

India’s Industrials sector continued to treadalong on the path to recovery as aggregate sales of 38 industrial companiesdeclined by just 3.0 per cent Y-o-Y in 3QFY21 (down 8.0 per cent Y-o-Y,adjusting for inflation) vs. the 10 per cent decline in 2QFY21, according to arecent market analysis report. In fact, ex-BHEL sales grew 0.4 per cent Y-o-Y,as the sector recovered to 100 per cent of pre-Covid levels.

The growth was led by mid-to-early cyclecompanies in bearings, abrasives, compressors, machine tools, and miningconsumables, which reported positive growth, while only select late-cyclecompanies in power generation, EPC (mainly oil and gas and captive power) continuedto remain in the negative territory. Only 12 of 38 companies reporteddouble-digit declines in sales.

Growth in sales and order inflows were drivenby:

a) Sharp rebound in the automotive segment,

b) Commodity-price led uptick in sectors suchas steel, cement and other non-ferrous metals,

c) Building segment from segments linked toPLI schemes, data centres, and residential realty, and

d) Chemicals, F&B and Pharma.

Order inflows jumped 29 per cent Y-o-Y, butthe entire improvement was led by chunky orders for Bharat Electronics andKalpataru. According to an analyst with JM Financials, a significant pick-up inorder inflows is expected in FY22, on government-led infrastructure capex, PLIscheme-led capex in multiple sectors, private sector capex cycle recoveryamidst improved profitability and low interest rates, and normalisation ofexport activities. Operating margins continued to inch up but a sharp rise incommodity prices and ocean freight rates can be near-term dampeners.


Revenue growth

Aggregate net sales witnessed a decline of 3.0per cent Y-o-Y (adjusting for price inflation, sales declined by 7.8 per cent Y-o-Y).Ex-BHEL sales turned flat +0.4 per cent Y-o-Y, adjusting for inflation, it wasdown 4.5 per cent.

Late-cycle companies in the power equipment,captive power, power T&D equipment, and gen-set segments are back topre-Covid levels. Mid-cycle/Early cycle companies in bearings and abrasiveshave seen double-digit growth mainly due to a strong rebound in the automotivesector while pumps and compressor companies are also following a similartraction.

Companiesin power segment, power-gen (-42 per cent), captive power (-22 per cent) andT&D equipment players (-6.0 per cent) witnessed a slower recovery due toits nature of products focused towards late cycle, although higher servicerevenue and project revenue aided in the recovery. T&D EPC (+7.6 per cent) sawrobust recovery due to accelerated ramp up in execution, increasing labourstrength, automation, and quality of execution.

Enginecompanies witnessed flat revenues (-0.4 per cent Y-o-Y) as exports and domesticsales both witnessed solid recovery. Industrial engines saw a solid growth ledby construction, mining, and agriculture segments and also as implementation ofBS-4 emission norms led to pre-buying of equipment. Certain pockets likerailways and compressors continued to lag.

Acrosssub-segments, data-centres, infrastructure and residential real-estate areseeing strong demand while retail, commercial reality and hospitality sectorsremain subdued.

Bearingswitnessed solid growth (+18.2 per cent Y-o-Y) led by a solid double-digitgrowth in the automotive segment. 2-Wheelers, Passenger Vehicles and tractorswitnessed solid growth led by shift to personal mobility and pent-up demand,while even Commercial Vehicles volumes contributed significantly.

Withinindustrials, wind-segment, metals, and general industrial companies witnessedstrong demand while railways continue to be subdued. Auto aftermarket growthwas slower than OEM growth.

Industrialproducts, such as pumps (-8.0 per cent) and compressors (+3.0 per cent)witnessed healthy performance. Abrasives and ceramics (+12.6 per cent) reportedsolid recovery led by strong demand from the automotive sector, some pockets ofreal-estate and construction (especially home refurbishments), electronicssector, and maintenance orders from core-sectors. Metal tooling also saw a goodrevival due to sharp increase in production at auto companies and revival in roadconstruction.

Consumerdurables companies saw a strong growth of 11 per cent Y-o-Y, mainly led bystrong performance by Voltas’ UCP division (+40 per cent) and Blue Star’s UPdivision (+17 per cent). Voltas’s EMP segment also witnessed a 26 per cent Y-o-Ygrowth while Blue Star’s EMP segment declined 23 per cent.

Amongother consumer durable companies, Hitachi and Whirlpool reported a growth of 12per cent and 18 per cent respectively, while Symphony reported a decline of 40per cent.


Exports momentumcontinues

Exports momentum continued as large exporterslike Cummins India, AIA Engineering, Carborundum Universal and Elgi Equipmentscontinued to see robust demand on back of recovery and inventory build-up. CumminsIndia saw 1.0 per cent Y-o-Y growth in exports, almost sustaining Q221run-rate. Elgi Equipment’s share of international revenues has increased from49 per cent to 53 per cent in 9M21 led by growth in USA, Australia, EU andcomplete recovery in South-East Asia.

Late-cycle companies like Thermax also sawimprovement in some of its geographies. KEC International and Kalpataru Power continueto bag select orders in the international segment. EBITDA improved forexporters led by strong cost-cutting initiatives.


Small ticket productsales flat Y-o-Y

Small-ticket industrial goods’ companieswitnessed a strong recovery (+11 per cent Y-o-Y vs -1.0 per cent in 2Q21) displayinga solid recovery in manufacturing activity across various segments,particularly in agriculture, automotive, robotics and industrial automation,tools and cuttings, and automotive sector linked segments.


Railways – Outlook buoyant

Withinrailways, electrification, widening of tracks, telecommunication work, anddomestic metro segment are seeing healthy ordering. There has been a delay inordering pipeline of `60-bn,but overall outlook on railways continues to remain buoyant. Government push oninfrastructure will drive civil orders for metros, data-centres,water-pipelines, oil and gas, factories and smart cities.

Auctionsfor the first few tenders of the green-energy corridor have alreadymaterialized and orders should be awarded by 4Q21. Among states, Karnataka,Tamil Nadu, Andhra Pradesh, Assam, Orissa and Rajasthan are seeing strongordering.

Theinternational T&D opportunity is larger than domestic and shall grow fasterthan the latter. International T&D pipeline is strong in SAARC, Middle Eastand Africa. The total opportunity from the overall T&D pie is `180-`190-bnover the next 6-8 months.


Observations duringthe quarter

Industry experts observed large sectors, suchas steel and cement, continued its strong momentum in 3Q21. In Dec- 20, steelproduction grew 3.0 per cent Y-o-Y and cement production declined only 4.0 percent Y-o-Y.

Tractors witnessed the highest growth clockinga 27 per cent Y-o-Y growth in 3Q21. Passenger Vehicles and 2-Wheelers alsoturned positive clocking 1.0 per cent and 15 per cent growth, respectively. Railwayfreight grew 11 per cent Y-o-Y growth while port traffic growth was slightlyslower (+2.0 per cent Y-o-Y) due to congestion at ports.


Engineering exports

Engineeringexports declined 4.0 per cent in 3QFY21 mainly led by 11 per cent Y-o-Y declinein iron and steel exports while all other items witnessed flat to higher singledigit growth. Imports declined 11 per cent Y-o-Y in 3Q21 led by a broad-baseddecline while only ferrous/non-ferrous metals and transport equipment witnessedan increase in exports. In 3Q21, import-export gap stood at 20 per cent.

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