The saving grace about BGR Energy System Ltd’s performance in the December quarter was that it reported flat revenue growth from a year ago. In that sense, it was better than rivals such as Bharat Heavy Electricals Ltd (Bhel) and Thermax Ltd, whose revenues shrunk.
Still, the results are not all that surprising given the gloom surrounding the capital goods sector in general, and power equipment suppliers in particular.
The impact of the economic slowdown is most visible in the slowing down of orders for most of these companies. Bhel’s order book declined 22% from a year ago. For BGR Energy, the order backlog fell to Rs.13,578 crore at the end of December from Rs.13,979 crore three months ago, suggesting tepid inflows.
That problem is not going to go away soon. As the International Monetary Fund (IMF) noted recently, even cutting interest rates will not be enough simply because hurdles such as fuel shortages, delayed project approvals and slow execution are the key factors slowing investment.
That risk is already clear for such firms since there are delays from the customer’s end if the latter does not have necessary approvals or coal linkages in place. Apart from the competition from Chinese and Korean companies, that is the biggest problem for power equipment suppliers.
According to Espirito Santo, “Coal India has agreed to sign FSAs (fuel-supply agreements) with power plants that get commissioned before 15 March and have PPAs (power-purchase agreements) in place. This provides limited visibility for (approximately) 32 gigawatts (GW) of capacity under construction against a total of (approximately) 92GW for projects under construction.”
Falling revenues have already started impacting profitability metrics. Just like in the case of Bhel, for BGR, too, earnings before interest, taxes, depreciation and amortization (Ebidta) margins declined. For the latter, it was mainly owing to the construction and EPC (engineering, procurement and construction) segments, which dragged down overall margins by 2.59 percentage points to 13.7%. The situation is not going to improve as BGR starts executing NTPC Ltd’s orders where its bids were very aggressive.
BGR has an additional problem of high receivables (as evident from the September-quarter results) and that boosted interest costs by 9% from a year ago. As a result, net profit declined by 24.2% from a year ago to Rs.44.1 crore.