Accounting changes, follow-on offer drag down Bhel’s stock

Accounting changes, follow-on offer drag down Bhel’s stock

Bharat Heavy Electricals Ltd (Bhel) shares fell 6.7% on Monday after the March quarter results were declared, which was a surprise given the euphoric 3% jump when the provisional results were announced in the first week of April.

The main dampener was the government’s decision to sell 5% of its stake (at present 67.75%), which implies a follow-on public offer (FPO), besides a stock split. Market data show that such offerings by the government in the recent past have always been at a discount to the prevailing market price.

Also see | Raining Discounts (PDF)

In February 2010, the FPO floor price of two public sector units—NTPC Ltd and Rural Electrification Corp. Ltd—was at a 6-8% discount to the then prevailing market price. In fact, both stocks slid steadily as soon as the decision was announced. Last August, Engineers India Ltd, too, met with the same fate. Its FPO price was around 11% lower than the market price.

But the FPO may not be the only reason behind the fall in the stock. A few changes in accounting policies that led to a deviation in adjusted net profit, both for the March quarter and the full year, pulled down the stock, too. These accounting changes were about the treatment of employee leave expenses, depreciation policy on equipment and provisioning of warranties for construction contracts.

Adjusted net profit for the quarter was 16% higher than a year before, but disappointed the Street as it was marginally lower than the provisional numbers and about 5% less than analysts’ consensus estimates.

Yet, one cannot ignore Bhel’s huge order book of Rs1.6 trillion, which negated concerns on order inflows and the firm’s ability to compete with Chinese and Korean suppliers. Margin pressures may exist, but analysts appear confident of a 15% compounded growth rate in earnings over the next two years.

That augurs well for the longer-term outlook. However, one may see some volatility in the near term, until the FPO price is fixed, which could perhaps give investors an arbitrage opportunity.

Graphic by Yogesh Kumar/Mint

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