Barring Bharat Heavy Electricals Ltd (Bhel) and Larsen and Toubro Ltd, the March quarter earnings of none of the major capital goods companies impressed the Street. As the adjoining chart shows, order inflows increased at most companies. But slower execution and lagging profitability tempered expectations, resulting in cuts in earnings estimates.

Also weighing on expectations is the lack of visibility on large projects. Demand from consumer-focused industries such as food and beverages and automobile sectors is healthy, ABB India Ltd told analysts. But a broad-based recovery is still missing.

Sectors such as cement, whose capacity utilization is rising, are finding the need for efficiency improvement, and investments are happening in existing plants, ABB said. Further, the firm sees opportunities in upgradation of refineries and government-led investments in infrastructure sectors.

Similarly, Thermax Ltd sees a good order pipeline from steel, cement and fertilizers for mid-sized captive power plants, points out Edelweiss Securities Ltd. However, the management does not foresee significant enquires for large projects (more than Rs1,000 crore), the broking firm says. “Most private companies are going in for brown field expansions, with only a few sectors coming up with green field plans, the revival of which is key to Thermax’s re-rating," Edelweiss said in a results review note.

An analyst who tracks the sector at another broking firm agrees. Companies are seeing good base orders, but large orders that provide earnings delta (a disproportionate boost to earnings) are yet to see meaningful recovery, the analyst says.

Perhaps this is the reason why shares of most companies mentioned here closed the earnings month of May with losses, compared with a slight gain in the benchmark Sensex.

That said, on the positive side, companies have good order backlog, which provides decent visibility. But the key factor to watch for in the near term will be profitability. Firm commodity prices can raise cost pressures and weigh on profitability.

Also, with demand recovery being muted, competition is expected to remain firm, capping profitability. “Higher competitive intensity in the domestic power generation segment limited Cummins India Ltd’s ability to pass on the recent rise in commodity prices," Emkay Global Financial Services Ltd said in a note, adding: “The management commentary indicates that the company (Cummins India) would focus on increasing its market share and would likely sacrifice margins in the short-term."

In a nutshell, the March quarter results did not provide any indication of a major turnaround of the capital goods sector. Rather, the results have stoked concerns about profitability, whose trajectory will be tracked in the coming quarters.

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