Bhel fires up performance, but order inflows trip

Bhel is now sitting on an order book of Rs98,400 crore that has contracted by 10% compared to a year earlier


Bharat Heavy Electricals Ltd’s (Bhel’s) December quarter performance was no doubt power-packed. The problem though is that dwindling order inflows and a shrinking order book are a cause for investor concern.

So far, the company’s strong order book helped revenue growth even when the economy was in turmoil. The December quarter’s Rs6,325.5 crore revenue therefore was 19% higher than a year back and shot past Bloomberg’s 23-broker average estimate on the Street.

But Bhel is now sitting on an order book of Rs98,400 crore that has contracted by 10% compared to a year earlier. This mirrors lack of new orders— the company’s paltry order inflow of about Rs1,300 crore was a steep fall of 79% from a year back. Total order inflows for the nine months ended December was about Rs6,500 crore.

Analysts have pencilled in Rs15,000 crore for fiscal year 2017, which would be a huge drop from FY16’s Rs36,000 crore order inflow.

The economic downturn has hit power generation requirements, given that power plants in the country operate at a plant load factor of about 60%.

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According to Kunal Sheth, an analyst at Prabhudas Lilladher Pvt. Ltd, revenue visibility in the medium term (about 24 months from now) may be at risk, given the subdued order inflows. That may be why the Bhel stock did not continue its upward trajectory after a stellar performance in the September quarter.

While about two-thirds of the company’s existing order book is problem-free and has an execution cycle of about two-three years, the remaining is either slow-moving or faces hurdles. Analysts also believe that the management view of orders coming in through upgrade of old power plants is too ambitious for the near term.

What could give investors comfort though is the sharp turnaround in operating performance. The December quarter’s operating margin of 3.5% was a sharp improvement from the loss in the year-ago period and, also it was a good 220 basis points higher. Gains came from an expansion in gross margin, which the management reckons has scope to rise further. A basis point is one-hundredth of a percentage point.

But all is not rosy on the cost front either. The higher salaries due to the Seventh Central Pay Commission recommendation will increase staff costs, which were flat in the December quarter. Besides, competitive intensity may threaten the company’s future profit margins in new orders, thereby tempering profits.

So, while the huge beat in operating and net profit fired the stock, the moot question is how long it will continue. At Rs151, Bhel’s stock implies a price-to-earnings multiple of about 15 times the FY19 estimated earnings on the Street. Indeed the stock price may hold out for a couple of quarters more as execution of existing orders will feed the revenue stream.

Bhel’s best days, therefore, seem behind it. Only a revival in order inflows will keep investors interested in the stock.

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