Power equipment maker BHEL's 19 per cent growth in sales in the December quarter, over a year ago, did not translate into healthy earnings growth. Higher transportation and freight costs and increased provisioning for doubtful debt as well as contractual obligations — all resulted in a muted 2 per cent growth in net profits for the period.

Order book concerns

As if the dismal environment in the power sector in the country was not bad enough, new challenges, in the form of order cancellations and curtailed orders, besides delay in key orders from NTPC, all added to BHEL's cup of woes.

For the first time in over two years, BHEL's order book also declined 7 per cent to Rs 1,46,500 crore compared with a year ago.

Order inflow in the December quarter was negligible. However, this time around, it was not intense competition but the total drying up of orders from the power sector, which led to contraction in order book. BHEL and its peers in the power equipment as well as the power transmission and distribution space have been hurt by slow/delayed investments by both power utilities and other industries.

The more worrying factor on the order front is the reduction of Rs 5,850 crore of orders from the book, both on account of cancellation of some private sector order as well as certain changes in scope of orders. While the above amount, as such, is not high, it does cause concern on any further cancellation of orders by private power developers, especially given the current difficulties faced with coal linkages and financing.

Dip in order inflow also means lower advances from customers. Higher debtors and lower advances have led to deterioration in working capital of BHEL is the last two quarters. While slightly better than the September quarter, working capital days remained stretched at 62 days as of December from 25 days as of March 2011.

On the positive side, BHEL managed to execute projects at a reasonable pace, maintaining its sales growth in double digits for the first nine months of FY-12. However, its operating profit margins contracted to 17.9 per cent in the latest quarter from 21.7 per cent a year ago, much of it on account of higher freight costs and transport costs, besides higher provisioning.

In its conference call, the company has stated that larger size of consignments arising from despatch of bigger equipment resulted in hike in freight costs.

Cost increases

Freight costs, part of selling expenses, more than doubled to Rs 175 crore, compared with a year ago. Besides, the company also provided for contractual obligations. However, such a provision is reversible.

Going forward, given that BHEL's orders are for bigger equipment of 600 MW or above, such costs could temper profit margins. Competitive pricing may not allow the company to build all costs into pricing.

Key factors to watch out for in the coming quarters would be any further cancellation of orders and the company's ability to reduce its working capital days. As for order inflows, only an improved macro environment and any quick initiation by government for its power target in 13{+t}{+h} Five-year Plan can provide traction.


(This article was published on January 28, 2012)
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