Mumbai: The cautious tone in the management commentary on Bharat Heavy Electricals Ltd’s (BHEL’s) post Q2 results conference call with analysts pointed to weak macroeconomic conditions in the country, strained liquidity in the banking system, lacklustre investment demand and a weak capex cycle, particularly for the power sector. That major clients have ceased to pay advances on new orders and are negotiating contracts on deferred payment terms indicates that pain for the sector is far from over.

For BHEL, the problem is further compounded by its client composition. The share of state electricity boards has risen to more than half its revenue. A delayed payment cycle from this segment along with a poor mix of industrial orders has led to an increase in customer receivables to 39,000 crore from 35,500 crore in end-FY18. According to Emkay Global Financial Services Ltd, BHEL’s rising receivables have been a cause for concern for long.

This is also seen in other capital goods makers, especially those whose customer base is linked to the power sector.

Analysts, therefore, estimate a further deterioration in BHEL’s working capital, which in turn will hike borrowing costs for the company.

That apart, while order flows for the quarter rose by 175% year-on-year (y-o-y), the paltry 5,200 crore orders bagged shows that growth is skewed by the low base. With industrial orders not gaining traction to the desired levels, the onus is on public sector capex for order flows to tick. The silver lining is that BHEL is the lowest bidder in several forthcoming orders in the public sector. However, given the Lok sabha elections in 2019, order flows will peter out. Emkay estimates are that order flows for FY19 may contract by a substantial 25% from the previous year.

However, BHEL is sitting on a huge 1.5 trillion order book, which is an assurance that the revenue clock will continue ticking for a couple of years. The management is striving to contain costs as seen in the Ebitda and net profit rising by a strong 41% and 60%, respectively, year-on-year.

To sum up, the issue is not so much to do with the order book or cost pressures. It is the inertia in some parts of the economy that is proving to be a headwind for the investment cycle. Edelweiss Securities Ltd in its results review says that while it is positive about a gradual recovery in the firm’s health, “recent deterioration in working capital and adverse payment terms raise fresh challenges and are our core monitorables".

The sharp cut in earnings growth by most brokerages is not surprising. Even the 15 times price-to-earnings multiple based on the estimated earnings for FY20, looks expensive at this juncture.

BHEL’s stock has plummeted by 10% since its Q2 results were announced last week and is likely to remain under pressure in the near term.

On Friday, BHEL shares fell 4.19%, or 2.95, to 67.40 on the BSE while the benchmark Sensex shed 1.01%, or 340.78 points, to end the day at 33,349.31.