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High raw material costs, wages take a toll on Bhel

High raw material costs, wages take a toll on Bhel
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First Published: Fri, Jan 30 2009. 11 18 PM IST

Updated: Fri, Jan 30 2009. 11 18 PM IST
The performance of Bharat Heavy Electricals Ltd (Bhel) in the December quarter has been tepid, with profit after tax growing just 2.4% compared with the year-ago period.
It’s true that tax refunds boosted profits a year ago at India’s biggest maker of electrical equipment, but the main reasons for the dismal show were higher raw material prices and additional provisions to take care of a wage revision.
Raw material costs remained high in spite of steep fall in metal prices because they were using up inventory bought at the earlier high prices.
Margins have fallen. With inventory at four months of indigenous materials and six months of imported materials, Bhel will be able to reap the benefits of lower metal prices only by the first quarter of the fiscal year that starts on 1 April. Additionally, a large proportion of the work done by the company during the December quarter was civil construction and balance of plant work, which is outsourced and earns low margins.
The company’s profit was also hit by higher provisions to take care of a wage revision. The provision for the whole year is estimated at Rs1,313 crore, of which Rs839 crore has already been disbursed. But, with the balance provision falling due in the fourth quarter, profits in the next three months will also be hit.
At the same time, the management has forecast a 25-30% growth in revenue for the fiscal year ending March, well above the 17% rise in revenue in the December quarter.
Will the company be able to increase revenue growth in the fourth quarter? The management points to the high amount of work-in-progress, which will be translated into revenue in the next quarter.
Next year, however, is likely to be much better. Margins will improve as the effect of raw material prices kicks in. The management has been trying to increase the proportion of higher value-added boiler and turbine work in contracts, which also should raise margins.
Employee expenses will not increase so rapidly, because all the wage provisions will have been made this fiscal year. And finally, there has so far been no let-up in orders.
The risks include more intense competition from Chinese suppliers, as Bhel has enjoyed a measure of protection so far due to rupee depreciation.
It is also trying to combat the slowdown by setting up joint ventures. One of them is with General Electric Co. for diesel locomotives, while another is with a Japanese company in the transmission business.
Write to us at marktomarket@livemint.com
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First Published: Fri, Jan 30 2009. 11 18 PM IST