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Business News/ Market / Mark-to-market/  Weak domestic demand continue to affect capital goods firms
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Weak domestic demand continue to affect capital goods firms

Thermax, ABB India and Bhel continue to be hobbled by weak order inflows

Though analysts do not believe the situation will continue to deteriorate, they are not expecting an earnings rebound in the near term either. Premium
Though analysts do not believe the situation will continue to deteriorate, they are not expecting an earnings rebound in the near term either.

Capital goods firms continue to be hobbled by weak order inflows. Consider the cases of Thermax Ltd, ABB India Ltd and Bharat Heavy Electrical Ltd (Bhel).

Thermax reported a 10% rise in revenue for the March quarter. High other income helped the company grow its net profit at a faster pace of 25%. These results, however, provide little comfort. The company finished 2014-15 with an order backlog of 4,396 crore, 18% lower than the previous year. The consolidated order book stood at 5,671 crore, down 7% from last year’s level of 6,121 crore.

The subdued domestic market weighed heavily on order inflows. According to the company, there has been “no noticeable recovery" in the core sectors of the economy. The commentary matches that by other capital goods firms.

ABB India, which released its results early this month, said customers are reluctant to make new investments due to low utilization levels and ample free capacities. The company’s order inflows fell 6% in the March quarter. Its order backlog increased just 1% from the year-ago period. Bhel also exited 2014-15 with little change in the order book from a year ago.

To compensate, Thermax and ABB India see opportunities in the export markets. But such orders can support the companies only to some extent as they predominantly depend on the domestic economy for their business.

Similarly, Bhel is favourably placed in projects totalling a huge 20,000 megawatts, but analysts doubt if the company can grab a major portion of the opportunity in the current fiscal. “We believe downside risks to FY16/FY17 order inflows remain as most of the contribution would likely come from select state and central utilities," Religare Capital Markets Ltd said in a note on Bhel.

Though analysts do not believe the situation will continue to deteriorate, they are not expecting an earnings rebound in the near term either. In fact, the delay in investment recovery is likely to result in earnings cuts. “The street is waiting for initial signals of future order inflow prospects. We believe the recovery of the investment cycle is slower than anticipated earlier. Hence, we have revised down our (Bhel) earnings estimates for FY2016 and introduced FY2017 in this report," Sharekhan Ltd, a brokerage, said in a note on Bhel.

These concerns are weighing on the share prices. After rising sharply in 2014, Thermax and Bhel are trailing the broader market index S&P BSE 500 since the beginning of the current calendar year.

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Published: 27 May 2015, 12:09 PM IST
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