Shares of Bharat Heavy Electricals Ltd (BHEL) rallied over 5% on Tuesday after it surprised the Street by reporting a sharp improvement in profitability for the March quarter (Q4). Its Ebitda (earnings before interest, taxes, depreciation and amortization) margin expanded 5.9 percentage points to 13.8% from a year ago, exceeding single-digit margin estimates of the Street.

The firm’s order inflows were also strong. Analysts peg inflows at Rs20,000-25,000 crore during the quarter. For fiscal year 2018 (FY18), BHEL received orders worth Rs40,932 crore, up 74% from the previous year. Four-fifths of the order inflows are from the power sector, an impressive feat considering the diminished size of the thermal power equipment market.

However, the profitability improvement may not be sharp as the reported numbers suggest. Apart from low raw material costs, a significant portion of the profitability improvement is due to a sharp fall in other expenses, which are down 32% from a year ago. This fall is due to forex benefit and the inclusion of one-time gratuity costs in the year-ago quarter, say analysts. Adjusted for this, the other expenditure is flat or has increased slightly, said one analyst.

Further, employee expenses which have risen sharply last quarter are expected to see a notable increase in FY19 as well. This can pose headwinds to margin expansion.

This commentary should temper investor expectations. Though the company is gaining fresh orders, the fear is that it is winning at the cost of profitability. Lack of significant capital expenditure in the conventional energy sector means equipment suppliers are chasing few orders. BHEL winning market share in this scenario may mean it could be quoting lower to win orders, said one analyst.

In a diminished market (and underutilization of existing facilities), BHEL also has to realign costs accordingly so that it can protect margins. Adjusted for one-off items, the March quarter results do not show such signs.

Also, the problem of receivables continues to plague BHEL. Trade receivables, which include customer dues, continue to rise, and now constitute more than half of the company’s balance sheet. According to Dolat Capital Market Pvt. Ltd some of BHEL’s clients are facing bankruptcy proceedings and on their resolution, the company may have to take a haircut.

The risk of further write-offs remains and the cheer generated by its profitability improvement may not last. A more sustainable improvement is possible if BHEL can control costs and also show a meaningful improvement in its receivables’ situation.