Bharat Heavy Electricals Ltd (Bhel), one of the bellwether stocks in the capital goods sector, has reported dismal results for the June quarter. At the end of the March quarter, the company seemed to be sitting pretty with an order book of Rs 1.64 trillion, or close to four times its annual revenue. The firm had also told analysts that it expects revenue to grow 20% in the current fiscal year, which had then seemed to be an easily achievable task.
In that backdrop, analysts tracking the firm had estimated revenue growth of 20-26% in the June quarter. Instead, Bhel reported a year-on-year growth of 10%. Clearly, the rate at which the company executed orders in the March quarter is a matter of concern.
But the bigger worry is the rate at which it is winning orders. Order inflows last quarter stood at merely Rs 2,400 crore, according to an analyst who attended the company’s “by invitation only” post-earnings conference call. Bhel’s order book, in fact, fell marginally to Rs 1.6 trillion, compared with the March quarter.
When the company had announced its annual results around two months ago, it had said it expects order inflows to grow by 10%, which works out to expected order inflows of Rs 66,000 crore during the current year. It has achieved less than 4% of this target during the June quarter, leading to the conclusion on the Street that the annual target now looks unachievable.
This led to the sharp derating of the company’s shares, which fell by about 5% after the results were announced on Tuesday. In the past one year, Bhel’s shares have fallen by around 23%, compared with a 3% rise in the Nifty. This has largely been on account of increased competition from Chinese vendors in the electrical equipment industry. While much of this derating was on account of Bhel’s shrinking share in the market, investors now have to also grapple with the fact that the market itself is beginning to shrink.
This could prove to be a double whammy for the firm. While it may be able to sustain a decent rate of revenue growth in the next couple of years because of its high order book, growth in the future will not pick up unless the market picks up. It doesn’t look like this will happen soon. Apart from high interest rates, which will cause vendors to go slow, there is also a shortage of coal to contend with. Hardly any new power projects are being announced.
The only consolation for investors is that the company’s shares have already underperformed and now trade at 15 times trailing earnings. But if news flow continues to be negative, the stock could correct further.
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