Order inflows: Where did this Rs 2.67 trillion go?

Over 93% of the orders in the year came from the central and state governments, PSUs, and NHAI.
Amritha Pillay and Ashok Divase report.

Illustration: Uttam Ghosh/Rediff.com

The year 2018 has been a good one for infrastructure and capital goods companies, with 30 per cent growth in new order inflows.

Nearly all the growth was fuelled by government and public sector orders, while private sector orders were conspicuously missing.

The data compiled by Business Standard shows that listed capital goods, construction and infrastructure companies reported combined order wins of more than Rs 2.67 trillion in calendar year 2018 (till December 24).

This is 30 per cent higher than the Rs 2.05 trillion reported to the exchanges in 2017 and also the highest since 2015.

The value of order wins may be higher than those reported by companies because not all order wins are reported to the exchanges for reasons such as client confidentiality.

Over 93 per cent of the orders in the year came from the central and state governments, public sector undertakings (PSUs), and the National Highways Authority of India (NHAI).

NHAI orders, at nearly a quarter of all new orders, were also at a four-year high, which can be attributed to the authority’s shift of focus two years ago from the build-operate-transfer (BOT) to engineering, procurement and construction (EPC) model.Orders from states doubled from 2017 to 2018, and their share increased to 21 per cent of new orders.

Vimal Kejriwal, managing director and chief executive officer, KEC International, attributed some of the wins to state governments.

“State governments have come back in a big way with orders, mostly due to the Saubhagya scheme,” he said.

Once villages are electrified, states will also need to step in and connect the households and villages through transmission lines, he added.

At the beginning of the current financial year, R Shankar Raman, director and chief financial officer, Larsen & Toubro, had said the current year would be front-ended in terms of order inflows owing to the Assembly and Lok Sabha elections, which were to follow.

Analysts point out only a small part of the order flows are for new capacities.

“The orders we saw in 2018 may be scattered across sectors and largely government-driven as full-fledged recovery in each sector is yet to happen.

"For instance, in the power sector, order wins are largely those for plant modernisation and not capacity expansion,” said an analyst.

Industry executives like Kejriwal expect the spotlight to move towards order execution and away from new orders.

“Due to elections, we expect order execution to be the focus more than just giving new orders as work on the ground is more impactful,” he added.

Industry analysts and officials remain confident about improvement in orders over the medium term, but expect some disruption due to the upcoming elections.

“The overall investment climate in the Indian economy has improved,” CARE Ratings noted in its December 13 note.

However, it said capital formation would depend on outcomes like maintaining capital expenditure (capex) by government, improvement in capacity utilisation rates, the possible impact of liquidity challenges in October-November on investments, and diluting the base effect in the index of industrial production (IIP), which will impact growth in capital goods.

“We expect order inflow growth to be flat to positive in the next six months due to the Lok Sabha elections, which may slow central government orders.

"Certain sectors where utilisation rates are improving may come up with plans for capacity addition and we remain positive on order inflow growth in the medium term,” said the analyst quoted earlier in the story.

The large dependence on states for new orders, however, runs the risk of populist measures like farm loan waivers.

India Ratings & Research in its report on Thursday said, “The farm loan waivers that have been announced by a number of states recently will adversely impact the combined state government capex spending.

"During periods of fiscal adjustment, like the one that is bound to arise due to farm loan waivers, capex becomes a soft target for deficit control.

"This has already been witnessed in the case of Maharashtra, Rajasthan, and Karnataka, which had announced farm debt waivers outside the Budget in 2017-18.”