Bhel’s plan to unlock value through leveraging assets a shot in the dark

In a bid to put its idle assets to work, government-owned Bharat Heavy Electricals Ltd (Bhel) has sought global partners who wish to manufacture in India. Although the move could help leverage assets and unlock shareholder value in the long run, it did little to excite investors.

Bhel’s mere expression of interest to invite global companies does not offer any comfort of near-term revenue or profit ramp-up.

“We believe it is too early to comment on how much value this could add for BHEL, as even in the most optimistic scenario, the first revenue contribution from such partnership will materialize only after 12-18 months,” said a note by Emkay Global Financial Services Ltd.

For now, the company is suffering from a complete lack of investor confidence, with India’s power generation sector in the doldrums.

With more than 80% of its revenue accruing from state utility projects, Bhel’s performance is mired with execution challenges, delayed payments, high inventory levels and stretched working capital for several quarters.

Its net receivables are about five times its market capitalization. This is mirrored in volatile profit margins (see chart).

After the December quarter, some analysts estimated Bhel’s revenue and operating profit to decline by about 4% and 10%, respectively, between FY19 and FY21.

But even these estimates look optimistic following the covid-19 outbreak and the subsequent lockdown. Power sector reforms, which were on the cards, are likely to take a back seat with the government’s focus diverted to health and social measures.

That’s not all. Order flows from both the power sector and industry are bound to be slow for the next 12-18 months.

As a result, the Bhel stock, which was a once a star performer among capital goods firms, is in an abyss. Its market capitalization has eroded from around ₹1.3 trillion a decade ago to a paltry ₹4,000 crore.

Against this backdrop, the company’s bid to invite overseas manufacturers rides on the government’s Make in India initiative. It is also the only hope to crank its idle assets.

A report by CLSA said: “At a time when the world seeks supply chain diversification, Bhel has invited multinational corporations to set up manufacturing bases in India on a plug-and-play model. Bhel could emerge as an engineering research and development services provider, a contract manufacturer, or a lessor of urban-area industrial land.”

Apart from its 16 state-of-the-art manufacturing facilities, the company also has an unutilized land bank reserve.

However, given the covid-19 pandemic and its impact across economies, it may be a long haul before the intent results in material benefit for Bhel.

Even the little hope of unlocking shareholder value with the government divesting its stake in the company has waned, given that equity markets are roiled by the effects of the coronavirus