Does Bhel deserve the high valuation this market is giving?
Bharat Heavy Electricals Ltd’s (Bhel’s) pathetic September quarter earnings, which come after a most unimpressive June quarter, underline the fact that there is little hope for firms dependent on power generation orders. Order flows were weak, revenue contracted and the once-acclaimed Maharatna posted the second consecutive quarter of operating loss. The results missed Bloomberg’s 17-broker average estimates on all counts.
That the current bull market is built on hope alone is underscored by the Bhel stock’s meteoric rise in the past one month, easily beating the benchmark Sensex. Does this stock really deserve a price-earnings multiple of around 19 times fiscal year 2019 (FY19) estimated earnings and as high as 30 times FY18 estimated earnings?
The results have, of course, quashed investor hopes. The quarter’s net revenue contracted by 4.3% year-on-year to Rs6,385 crore on weak execution. This is in spite of the company having a decent Rs97,090 crore order book, which is nearly three times its annual revenue. Perhaps the economic and tax reforms slackened execution too during the quarter.
But the bigger disappointment was the operating loss of Rs95 crore. Not only was this higher than in the June quarter but it disappointed the hopes of investors, who had, riding high on unrealistic expectations, pencilled in a profit of Rs254 crore. This was in spite of the gross margin improving during the quarter. Provisions for wage revision to the tune of Rs250 crore and an additional Rs295 crore of financial provisions (on operating grounds) spoilt the party. So, other expenses shot up by 70% year-on-year, which dragged the power equipment giant into an operating loss for the second quarter in a row.
Further, the net profit of Rs115.4 crore is nothing to rejoice over. Firstly, it missed forecasts widely. Secondly, the management, in a conference call with investors, clarified that it included a substantial gain on account of exchange rate variation.
As if all this wasn’t enough, the order flows for the quarter were dim at Rs1,874 crore, 6% lower from the year-ago period. Indeed, the management has consistently assured investors that the prospects could improve as the company diversifies into non-power areas. But the proof of the pudding will be in the eating.
Unsurprisingly, the stock tanked by 6% as soon as the results were announced. For now, it certainly looks like Bhel’s power is dimming with no near-term hope for investors, given that the strategic shift of higher exposure to other businesses will take time.