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Crisil downgrades BHEL rating on long-term bank facilities, outlook negative

Crisil said the ratings continue to reflect BHEL’s leading market position in the power generation and electrical equipment marketsPremium
Crisil said the ratings continue to reflect BHEL’s leading market position in the power generation and electrical equipment markets

The ‘Negative’ outlook has been based on the possibility that BHEL's profitability may remain under pressure in financial year 2021-22 amid the ongoing pandemic, further weakening the credit risk profile, Crisil noted

Ratings agency Crisil has downgraded the rating on long-term bank facilities of Bharat Heavy Electricals Ltd (BHEL) from AA/negative to AA-/negative. The agency has reaffirmed rating on the company's short-term facilities at A1-plus.

Crisil said the rating downgrade reflects weakening of business and financial risk profile of the business and financial risk profile of BHEL, on account of significantly weaker-than-expected operating performance in fiscal 2021, and operating losses reported for the second consecutive year.

The ‘Negative’ outlook has been based on the possibility that BHEL's profitability may remain under pressure in financial year 2021-22 amid the ongoing pandemic, further weakening the credit risk profile, Crisil noted.

During the financial year ended March 31, 2021, BHEL's consolidated net loss stood at 2,697 crore as compared to net loss of 1,466 crore in the previous fiscal. At the same time, revenue from operations skidded 20.48 per cent to 16,296 crore in FY21 from 20,495 crore in FY20.

While BHEL's net cash levels improved, despite high operating loss, working capital intensity was high due to lower revenue base during fiscal 2021. Government order mandating time payments to MSMEs further limited flexibility to fund working capital by stretching payables.

The management’s focus on improving collections along with various cost rationalisation measures, could support cash balance to some extent, Crisil stated.

"Crisil Ratings has noted the various initiatives taken by BHEL such as Quality First, strategies to control raw material cost, focus on cash collection, and exploring new opportunities to diversify revenue base away from the power sector. However, these efforts are yet to fructify and could be visible in terms of financial performance only over the next 12-24 months, and would thus be a key monitorable," the ratings agency said.

Crisil stated the ratings continue to reflect BHEL’s leading market position in the power generation and electrical equipment markets, and strong, but moderating, financial risk profile. These strengths are partially offset by structural issues in the power sector, sizeable working capital requirement and exposure to intense competition, it added.

Sustained improvement in operating revenue, with operating profit above 6 per cent, on the back of higher-than-expected order execution along with efficient raw material consumption and cost control could lead to an improvement in the rating, Crisil mentioned. Sustained net cash of over 3,000 crore, driven by higher accrual from operations or reduced working capital intensity will also cause an upward trend, it said.

However, weakening of business risk profile through low order intake or delay in execution of orders, resulting in reduced scale of business and continued operating losses could put downward pressure on the rating. Weakening of the financial flexibility due to reduction in net cash position to below 1,000 crore, either because of lower-than-expected cash accrual, high dividend payout, or increased working capital intensity, could also lead to further downgrades.

BHEL is an integrated power plant equipment manufacturer with operations in power and industry segments. The government holds 63.17 per cent stake in the Maharatna central public sector enterprise which works under the Department of Heavy Industries.

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