The provisional 2014-15 results of Bharat Heavy Electricals Ltd (Bhel), the country’s largest power equipment maker, mirrored the dismal state of the capital goods sector. Project delays, cost overruns and weak order inflows are hurting performance.

Its March quarter numbers (derived from full-year results) were way below the Street’s forecast. The biggest shocker was the 56.9% drop in net profit against the year-ago period. It was 25% lower than Bloomberg’s consensus estimates in spite of analysts being cautious.

For the full year, too, Bhel posted a net profit of 1,314 crore, which was 38% lower than a year ago and nowhere close to brokerage forecasts. The main reason for its poor performance can be attributed to weak revenue growth due to the slow movement of orders in hand and lengthy billing cycles. The management is in the silent period, given the proposed equity share sale by the government.

Note that Bhel shares had rallied significantly a year ago on news of the government’s divestment programme. Bhel’s performance after that did not support the rally. Net profit in the first three quarters of 2014-15 had fallen 58%, 81% and 69%, year-on-year, as the company’s operating performance flagged, in spite of stringent cost-control.

Bhel’s full-year earning per share of 5.4 is a full 40% below Bloomberg’s consensus earnings estimate. At 235, the stock discounts one-year earnings estimates 22 times. Analysts may revise estimates downward, given its performance.

The only positive development is a 10% increase in full-year order inflows to 30,800 crore. But this, too, has fallen short of the management’s watered down estimate of 50,000 crore for 2014-15. The March quarter’s order inflow fell by nearly 38% over a year ago.

While the current situation seems gloomy, a gradual recovery in the economy and the government’s focus on infrastructure investment are positive factors. Bhel is expected to see an increase in orders only in the last lap of the investment cycle, when the actual equipment orders are placed. Power equipment comprises three-fourths of its revenue.

Some months ago, Religare Capital Markets Ltd had indicated in a research report that while there might be some improvement in order inflows over the next two years, slow revenue growth and margin pressure would keep Bhel’s return on capital employed depressed.

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