BHEL: Hold

Tough economic environment in the last one year has been a challenge for BHEL. Lacklustre order inflows, delays in payments and execution and stretched working-capital cycles have confronted the company.

With the company not out of the woods yet, the triggers for the stock remain limited. Fresh exposures need not be considered at this juncture.

At the current market price of Rs 189, the stock trades at a valuation of 7 times its trailing 12-month earnings, which are at a historical low. Hence, shareholders can remain invested.

Intermittent order flows

BHEL’s order inflows of Rs 31,650 crore in 2012-13, representing a 43 increase over the previous year, might look inviting.

But it must be seen in the context of a low base in the previous year coupled with long-pending orders such as some of them under bulk tendering by NTPC and the Suratgarh project of the Rajasthan SEB awarded in the fourth quarter (January-March 2013). Order inflows until December 2012 were only one-third of the total orders awarded for the full year.

In fact, the company halved its order inflow guidance for the year from Rs 60,000 crore. Policy issues in the power sector and the weak macro-economic environment were some reasons.

Secondly, like the power sector, the industrial segment too has been hit. Industrial orders generally bring in about 20 per cent of the revenues for BHEL.

For instance, the slowdown in industrial activity coupled with non-availability of coal has had a major impact on the captive power segment orders.

Order backlogs have shown a deteriorating trend in the last two years. From about Rs 1.64 lakh crore two years ago, the outstanding order book at the end of 2012-13 stands at Rs 1.15 lakh crore. The company has faced some cancellations during this period. For instance, in 2011-12, about Rs 5800 crore worth of orders were cancelled.

The order book-to-sales ratio in this period has worsened from 3.9 in FY11 to 2.4 now.

The quarters to come may not be a bed of roses. One, the company expects orders to keep coming in from central and state utilities. Nevertheless, private sector participation is not expected to pick up soon.

Two, the tendering for planned capacity additions in the 12th Plan (2012-2017) is almost done and so traction from this front cannot be expected. Three, the company is also facing stiff competition from Chinese power equipment makers.

Chinese players will be commissioning almost 40,000 MW of capacity during the 12th Plan period, on an equal footing with BHEL. Four, considering the higher import content for super-critical projects at this juncture, margins may remain under pressure.

These projects now bring in one-fourth of the power segment revenues. Ditto with the trend of increasing number of EPC orders being awarded out.

To diversify its revenue stream, the company is working on areas such as transportation, renewables and water management.

Its production facility for railway coaches is expected to be ready in two years’ time. BHEL expects to add value to its power segment’s Balance of Plant systems (BoP), by inhouse manufacturing of water management systems required for the same.

Financials

Despite easing of raw material costs and lower employee expenses, the weakness in BHEL’s sales for the quarter ended March 2013, had an adverse impact on profits.

General economic slowdown and pricing pressures saw top-line growth dip by about two per cent to Rs 18,850 crore over the same quarter last year.

Lower other income and higher finance costs — partly due to a stretched working-capital cycle — pulled down profits. Net profits for the quarter came in at Rs 3,237 crore, four per cent lower than last year.

The pressure was more visible in the industrial segment. Margins in this segment dropped to 21 per cent from around 30 per cent in the same quarter last year.

Power segment margins remained more or less flat at around 26 per cent. Overall operating margins stood at 24.2 per cent, about a percentage point lower than the January-March 2012 period.

Unlike in the past, the management has not given any revenue guidance for the current year.

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