Markets
Bhel’s lacklustre show in Q4 bursts the bubble for its stock
Summary
With slowdown in order inflows and rising commodity costs, the pressure on profitability is likely to persistState-run engineering company Bharat Heavy Electricals Ltd (Bhel) continued to disappoint investors with a poor earnings performance. On a consolidated basis, its loss narrowed to ₹1,036 crore in Q4FY21 from ₹1,532 crore in the year-ago period, aided by an improvement in revenues.
However, at the operating level, the ₹1,260 crore loss was at a multi-quarter high. Operating performance was marred by higher other expenses, which shot up by 156% on a year-on-year (y-o-y) basis.
What’s more, order inflows at ₹4,400 crore in Q4FY21 declined 31% y-o-y. Analysts say the order environment in the power sector, which contributed around 75% to its revenues, is likely to remain weak. With a slowdown in order inflows and rising commodity costs, analysts caution that the pressure on profitability is likely to persist going forward.
Shares of the company stumbled 18% intraday on Monday on the NSE, and ended the day’s session about 12% lower. However, in the past six months, the stock has risen from ₹36.85 to ₹67.45 currently. This is a massive rally considering that the outlook for thermal power generation remains bleak.
To be sure, the firm’s diversification efforts have started to yield some results, particularly in the oil and gas segment. It should be noted that Bhel has received an order in the downstream oil and gas sector from Indian Oil Corporation Ltd for a sulphur recovery unit. It has also won an order for a 650 million tonne fractionator column from HPCL Rajasthan Refinery Ltd.
But analysts said that a meaningful contribution from these new initiatives is still some time away, adding that such a sharp rally in the stock is unwarranted. According to analysts at Edelweiss Securities Ltd, the market’s excitement about Bhel’s recent rally overlooks troubles in its conventional business such as sticky costs and under-utilization. Going ahead, elevated receivables, huge employee cost and stretched working capital leave no room for an immediate improvement in Bhel’s earnings outlook.
Analysts at Motilal Oswal Financial Services Ltd expect Bhel to report a net loss in FY22 as well. “The annual awarding run-rate in power equipment has currently fallen to 4-5 gigawatts from around 15 gigawatts. While orders are few and far between, the pricing environment remains highly competitive, limiting scope for margin expansion," they said.
