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The underperformer tag is not leaving capital goods companies in a hurry. A combination of sluggish demand, weak execution, low order inflows and continued slowdown in the power sector has made most of these lag the Street’s estimates.
Bharat Heavy Electricals Ltd (BHEL), the country’s largest power equipment manufacturer, led the pack with a 64 per cent net profit drop in the September quarter — its fifth straight quarter of decline in profits. Slowdown in fresh orders, coupled with high fixed cost, pulled its net profit down to Rs 455 crore, against Rs 1,274 crore in the same period last year.
Net sales during the three-month period also declined, by 15 per cent to Rs 8,819 crore, compared with Rs 10,399 crore in the corresponding period last year. “The decline in profitability has been sharper because of the company’s high fixed cost base,” said Salil Garg, director (Corporate Ratings), India Ratings & Research.
BHEL has been grappling with a high level of receivables from its customers, which have held back payments due to a liquidity crunch in the power utilities sector. BHEL’s trade receivables stood at Rs 29,760 crore as at the end of September — a marginal rise over the Rs 29,234 crore at the end of the second quarter last financial year.
About 70 per cent of the company’s revenue comes from the power segment, while the industry segment accounts for the rest. The 15 per cent revenue drop for both these segments was higher than industry estimates. The positive impact of an increase in other income was also offset due to loss in Bharat Heavy Plates and Vessels, amalgamated with the power equipment manufacturer.
BHEL’S smaller peer, Thermax, did no better. The Pune-based company reported 66 per cent decline in net profit to Rs 30 crore, against Rs 91 crore in the second quarter of 2012-13. Its revenue was down 12.5 per cent to Rs 1,043 crore. The company gave no specific reasons for its weak show, except that the market for capital goods was sluggish.
Voltas’ second quarter revenue declined seven per cent on a year-on-year basis — lower than the Street estimates. The decline was mainly due to a 14 per cent drop in its electro mechanical projects segment. Though its profit increased 35 per cent to Rs 42 crore, that was mainly on account of a 66 per cent rise in other incomes and impact of exceptional items.
The only silver line for the sector appeared to be ABB, which saw a 66 per cent increase in net profit to Rs 36 crore. Its sales, however, were marginally down. “The economic environment in India remains muted and capex investments continue to be deferred. While the renewed momentum in reforms is a welcome measure, the markets have yet to realise its tangible benefits. Meanwhile, we continue to pursue new growth opportunities, indigenise our portfolio and innovate to stay ahead,” said ABB India Managing Director Bazmi Husain.
Analysts expect the pain to continue for at least two quarters. “The situation will not change overnight. Demand is weak and power distribution companies are not placing enough orders,” said Kameswara Rao, leader (energy, utilities & mining), PwC.
According to Rao, the sectoral problem is two-fold — private power-generation companies are conserving cash to complete existing projects, instead of investing in new ventures, and fewer orders are coming from state-run distribution companies.
“The Q2 results in the capital goods sector were hit due to weak execution and tepid order flow. The overall order flow for companies has declined over the past eight quarters. Though there is a marginal increase in order inflow over the September quarter 2012-13, that is due to a lower base,” said Amit Patil, research analyst at Angel Broking.
Engineering giant Larsen & Toubro, too, has been facing issues with respect to its orders from the power sector, but it has managed to be a standout performer in the space — reporting 10 per cent growth in sales in the second quarter. L&T, however, has a far more diversified business structure and the power division accounts for only nine per cent of its order book, while the infrastructure division contributes about 69 per cent.
