BackBhel profits hit by poor utilization, high working capital
Travails of infrastructure segment continue to hurt operating performance of country's largest capital goods maker
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Bharat Heavy Electricals Ltd (Bhel) reported dismal results in the three months to September, marking eight consecutive quarters of decline in net revenue and profit. The travails of the infrastructure segment continue to hurt the operating performance of the country’s largest capital goods maker.
Bhel’s woes are a combination of weak execution and high receivables. Some slow moving, large orders, mainly in the energy sector, and a declining order backlog led to a sharp 32% decline in net revenue from the year-ago period. It meant low utilization of its factories, hurting operating profitability. Raw material costs and other expenses were contained to an extent. But staff costs rose quite a bit. Operating profit, which plummeted by 52% from the year-ago period, was also hugely below Bloomberg’s consensus.
The operating margin shocked the Street; at 4.7%, it was nearly 2 percentage points lower than in the year-ago period. Profitability dipped in both the power and industry segments.
A bigger concern is the high capital employed in spite of the decline in revenue, which indicates the stretched working capital cycle.
A report from Espirito Santo Securities India Pvt. Ltd also points out that Bhel’s high receivables situation is unlikely to change soon. Besides, about one-third of the receivables are outstanding for more than one year.
Most of its large private sector customers in the power and infrastructure segment have stretched balance sheets. This implies continued pressure on working capital, which may stymie profit growth in the next couple of years.
Two things need to happen for this to change. One, the existing clients’ balance sheets and credit-worthiness have to improve and, two, an economic recovery ushers in an era of more profitable new orders.
Until then, net profit may continue to slide. In the September quarter, net profit dropped by a huge 72% to ₹ 124.8 crore. Bloomberg’s consensus estimate of 32 brokers was nearly three times higher.
The only positive for investors at this point is that order inflows for the quarter, at about ₹ 12,900 crore, were four times than that clocked a year ago. This was mainly from the government power sector segment, though there are green shoots of recovery visible in the private sector, too.
The management reiterated a better second half given that it is expecting twice the number of orders in the remaining months to next March.
Bhel’s shares have beaten the benchmark Sensex on a one-year return comparison. Signs of recovery in the economy and confidence in the new government had already lifted the share price from a two-digit abyss to its current ₹ 249.2, which discounts 2014-15 estimated earnings per share by 25 times. Poor execution progress does not warrant any optimism on the earnings growth front, at least for another year.
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