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BHEL’s dismal performance reflects state of economy

LiveMint logoLiveMint 01-06-2017 Vatsala Kamat

New Delhi: The poor performance of the economy in the March quarter is mirrored in Bharat Heavy Electricals Ltd’s (BHEL) financial results. The performance of the country’s largest power generation equipment manufacturer BHEL shows the hapless state of power equipment manufacturers.

It’s well known that economic slowdown has hit power consumption, with barely 65% of the total capacity being utilized. So, BHEL’s weak order inflow of about Rs17,000 crore for the March quarter is not surprising. It also pulled down the FY2017 tally of fresh orders by 46% from the previous year. What’s worse is that some of its existing orders may not even take off, putting its existing order book of Rs1,05,000 crore too under threat.

That isn’t all. While the company pushed the pedal on executing its orders in the power segment that comprises nearly three-fourth of the total revenue, the industry segment revenue contracted by 21% year-on-year (y-o-y). Hence, total revenue too fell by 3% y-o-y. 

A weak growth in revenue often trickles down to weak operating performance. BHEL’s operating profit was about 25% lower than a year ago. Credit goes to the firm for posting an increase in gross profit as material costs were controlled by way of in-house sourcing and a favourable product mix. Yet, the 61% jump in other expenses to factor in provisions for gratuity and leave liability weighed down on profitability. Operating margin dropped by 200 basis points to 6.7%, although this was expected by the Street.

With the heavy engineering sectors that BHEL caters to not completely out of the woods, delayed payments and therefore smooth project execution are risks to revenue growth. Slow moving orders would also increase working capital needs that will weigh down on profits.

Given these challenges, the quarter’s net profit drop of 57% to Rs215.6 crore when compared to the year-ago period is unlikely to be a blip in BHEL’s earnings trajectory. A report by Emkay Global Financial Services says that it expects subdued profitability over the next several quarters impacted by a declining order book, higher employee cost and provisioning for long overdue receivables.

No wonder BHEL’s stock, which had a stellar rally over the last six months as its profitability got better, plummeted by about 15% since its results were announced last Monday. At Rs138.5, the stock trades at around 16 times the estimated FY2019 earnings, which is not cheap considering the challenges before it. It may be a long haul for investors from the current levels.

So long as the existing power generation capacity remains underutilised, BHEL’s order flows are unlikely to get a boost. Some analysts are confident about demand for equipment as the old power plants get replaced, but this is too small to fire up earnings in the near term. Stiff competition puts margins at risk too.

In other words, the worst may not yet be over for BHEL.

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