Capital goods firms are seeing early signs of payment trouble from customers. This could signal further dampening of investment sentiment in the core sector.

Equipment major Bharat Heavy Electricals Ltd (BHEL) is facing delays in payment of advances from power project developers against new equipment orders. As a result, despite having letters of intents for around 2,000 MW in the first quarter of the current fiscal, the state-owned firm did not report them as firm orders in its books due to lack of customer advances.

According to industry players, a mid-size private firm that supplies ancillaries to the power and the oil and gas sectors is refusing orders from smaller firms and first-time developers, despite idle capacity at its manufacturing facilities. Larsen & Toubro too missed its first quarter targets, mainly as power sector orders turned sluggish and lumpy.

This comes at a time when sluggish capital goods output has already started denting overall factory production estimates. The latest Index of Industrial Production growth slipped to 3.3 per cent in July 2011 from 8.8 per cent in June 2011, primarily on account of lower capital goods and intermediate products output.

“In the first quarter, there were several orders that were not reported due to lack of customer advances. In the current environment, unless the advance comes through, we have decided to neither confirm the order nor start work on those projects,” a senior BHEL official said. Officials with the state-owned company, while indicating that it is still sticking to the guidance on incremental order inflows of 10 per cent issued earlier this year, has now issued a rider saying that meeting the target is subject to the overall business environment improving in a “reasonable period of time”.

According to industry players, private equipment firms have turned selective in accepting orders amid worsening macroeconomic environment. The feeling is that the surge in interest rates, land acquisition troubles, coal linkage problems and high raw material costs threaten the viability of a number of future projects. Signs of brewing defaults in both the generation and distributions sectors are further compounding the woes of equipment firms.

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