MUMBAI: Engineering and capital goods companies may be forced to compromise on their margins to bag orders in the current fiscal, annual results of a few big firms for the year ended March suggest.
Siemens, Punj Lloyd and KEC International have reported sales growth of 20%-30% in the quarter to March, but their operating profit margin has declined 100 to 200 basis points because of a price war amid rising costs.
KEC International, for instance, reported a decline in profit in the quarter as margins shrank, despite a 32.7% year-on-year growth in consolidated sales to 2,069 crore. A basis point is one hundredth of one per cent.
ABB on Wednesday reported flat sales with a 66 bps decline in operating margin. "Our margins have been under pressure due to intense competition pressure. The competition is likely to be fierce even going ahead, so our aim would be to maintain margins in FY13," the company's managing director and chief executive officer Ramesh Chandak told ET.
Analysts, however, say that most firms in the sector will find it tough to maintain their margins.
"Profits of these companies will be under pressure in FY13 as margins may shrink," said Satyam Agarwal, co-head of research at Motilal Oswal Securities. "We are seeing that in many projects, companies are ready to compromise on margin and are quoting lower prices. The price pressure will continue next year."
Adverse economic conditions have dried order inflow - particularly from power, metals, oil and gas sectors. To make the situation worse, since project developers picked up government projects quoting aggressive bids last fiscal, they are likely to bargain for a good deal from their contractors, putting more pressure on them to lower prices.
Sector experts say that the companies that missed out on the projects last fiscal may now be ready to bid aggressively in the current scenario to protect their order inflow.
The core industries grew by 4.3% in 2011-12, compared with 6.6% in 2010-11, according to the data released by the commerce ministry.
Larsen & Toubro and Bharat Heavy Electricals, which are due to announce their results on May 14 and May 23 respectively, are expected to be in line with the broad trend.
"We believe that L&T is likely to downplay investor concerns on EBITDA margins and share upbeat guidance with stable EBITDA margins in FY13 over FY12. There is change in order backlog composition, which prompts reduction in EBITDA margin in FY13," Pritesh Chheda, analyst at Emkay Global Financial Services, said in a note. "We have factored 30 bps decline in EBITDA margins in FY13."
L&T maintained sales growth guidance of 25% since the beginning of FY12, but slashed its order inflow guidance to 5% from the original 15%-20%.
Information Source:- http://economictimes.indiatimes.com/news/news-by-industry/indl-goods/svs/engineering/engineering-companies-like-siemens-punj-lloyd-face-margin-pressure/articleshow/13129202.cms