No signs of stabilization at Bhel

Investors who were expecting to see signs of stabilization in Bhel’s December quarter will be disappointed with the company’s performance


The company, which managed to arrest the fall in its revenues from 15.5% in the June quarter to 3.2% in the September quarter, saw its sales drop 14% in the October-December period.
The company, which managed to arrest the fall in its revenues from 15.5% in the June quarter to 3.2% in the September quarter, saw its sales drop 14% in the October-December period.

Investors who were expecting to see signs of stabilization in Bharat Heavy Eelectricals Ltd’s (Bhel’s) December quarter will be disappointed with the company’s performance. The company, which managed to arrest the fall in its revenues from 15.5% in the June quarter to 3.2% in the September quarter, saw its sales drop 14% in the October-December period.

Aggressive bids and terms which mandate the purchase of higher priced components from technology partners (co-bidders) continue to impact Bhel’s profitability. Revenue at the core power sector business fell 9%. While that points to pressure on realizations, costs remained at elevated levels. Raw material costs as a percentage of sales increased 11 percentage points from a year ago to 66%, putting pressure on profitability.

The core power sector registered an operating loss of Rs.1,165 crore. At the company level, the operating loss (earnings before interest, taxes, depreciation and amortization) widened from Rs.474 crore in the September quarter to Rs.1,638 crore. Bhel made a provision of Rs.1,186 crore for projects which are stuck or put on hold. Even if one excludes the impact of this provision, Bhel will end up with an operating loss of Rs.452 crore, far below market expectations of a modest operating profit. A tax write-back helped it lower the net loss to Rs.1,101 crore.

Operating losses at the core power business widened, even after adjusting for the provision. Performance at the industries division, which generates one-fifth of the company’s revenues, dwindled further.

On a sequential scale, operating loss more than doubled at the division.

The dismal performance can put further pressure on the stock, which has halved in the last one year. Bhel ended the December quarter with an order backlog of Rs.1.09 trillion, more than three times the previous fiscal year’s revenue. But that provides no comfort.

An estimated third of the order backlog is slow-moving. And a substantial part of the order book comprises of super critical projects which have to adhere to the co-bidder obligations, putting pressure on earnings.

The company’s focus on volumes was expected to help it break even in the December quarter. But the results show that it is far from that target.

The writer does not own shares in the above-mentioned companies.

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