Capital goods sector toplines under stress on cash flow woes

The capital goods sector's credit quality has come under strain, with working capital requirements surging to a five-year high. According to a recent Crisil report based on a study of 50 capital goods entities involved in equipment manufacturing and construction, the pressure on this sector is primarily due to the deferment of large capital investment plans since fiscal year 2011-12 by several end users.

The resultant build-up in inventory and delay in release of payments by customers has led to a tight liquidity. The weakening credit risk profile of these entities gains significance as the capital goods sector acts as a lead indicator, signaling increased pressure on other sectors as well as for the economy as a whole.

According to an Emkay Global Financial Services report, the number of published tenders in August declined 10 per cent month-on-month, registering the second consecutive monthly decline, largely on account of lower demand for high-value capital goods such as power transformers and construction equipment.

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