BHEL’s stellar Q2 pales against its weak order inflows

In sharp contrast to the profit outperformance was the paltry Rs1,800 crore order inflow during the quarter, down 30% from a year ago


Tight control on expenses, be it raw material costs, employee costs or other expenses helped BHEL post a Rs155 crore operating profit from a loss in the year-ago period.
Tight control on expenses, be it raw material costs, employee costs or other expenses helped BHEL post a Rs155 crore operating profit from a loss in the year-ago period.

Shares of Bharat Heavy Electricals Ltd (BHEL) jumped nearly 3% on Tuesday after the firm beat analysts’ estimates on all operating parameters for the September quarter. But order inflows were poor and they paint a gloomy picture of the economy.

First, a look at the positives that drove the stock price up. Dogged execution and the 12% year-on-year (y-o-y) increase in net revenue were many notches higher that what the Street expected. Along with this, the firm’s tight control on expenses, be it raw material costs, employee costs or other expenses helped BHEL post a Rs155 crore operating profit from a loss in the year-ago period. This compares with Bloomberg’s consensus estimate of a profit of Rs68 crore.

BHEL’s net profit of Rs109 crore was a huge 82% above consensus estimates.

But one cannot overlook the negatives. In sharp contrast to the profit outperformance was the paltry Rs1,800 crore order inflow during the quarter, down 30% from a year ago. The first six months tally of Rs4,800 crore is barely one-fifth of what the firm secured in the previous comparable period. The order backlog fell to Rs1.03 trillion as opposed to Rs1.12 trillion a year ago. This is of concern as it points to a paucity of capital investment both in the power sector and industry.

To add to this, the management, in its analysts’ concall, has stated that some existing orders may be cancelled. Investors are also aware that a large part of the order book is in slow-moving projects, which may lead to slower revenue growth in the future.

If that happens, there is a lurking danger of the firm slipping again on the profitability front. After all, its operating margin was a wafer-thin 2.3% during the September quarter.

Lack of orders is a grave concern in light of the firm’s massive capacity. BHEL’s capacity for boiler-turbine-generator is 20 gigawatts (GW) and the entire industry pipeline of estimated orders is much lower. According to a report by Jefferies Equity Research, BHEL’s return on equity (RoE) will peak at 7% over the next two-to-three years.

At 100% capacity utilization, it would achieve an ROE of 13%, it says, adding that this is before the 7th Pay Commission changes come into consideration. Obviously, staff costs will inch up thereafter, dampening profitability.

The quarter’s performance was stellar. But, at Rs143.2 apiece, the stock trades at a rich 20 times the earnings estimated for FY18, especially keeping in mind the glum outlook.

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