Home >Markets >Mark To Market >Divestment possibility keeps hope alive for loss-making Bhel’s stock

Quarter after quarter, the earnings performance of public sector unit Bharat Heavy Electricals Ltd (Bhel) remains a case of mounting losses. The June quarter (Q1FY22) was no different with poor execution owing to covid-led restrictions and lower labour availability weighing on results.

Among the key disappointments was the company’s higher-than-anticipated net loss of 450 crore. Had it not been for a provision reversal of 180 crore, the loss would have been much higher. Due to increased fixed expenses, operating loss stood at 470 crore, although lower than the loss of 1,050 crore in Q1FY21, but more than double the consensus estimates of 210 crore.

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Elevated receivables continued to be a pain point with no meaningful improvement. Total receivables in Q1FY22 stood at 30,900 crore versus 31,300 crore at the end of last year. Central public sector units and state utilities accounted for a major portion of the total receivables. Further, its order book fell 6% year-on-year to 1.02 trillion and order inflows were tepid at 3,250 crore in the June quarter.

Still, so far in this calendar year, the Bhel stock has rallied 54%, beating the benchmark index Nifty 500, which has risen 19% in the same span.

Analysts say the optimism towards the stock is mainly due to the government’s divestment plans and strategic tie-ups.

“There are spurts in this stock whenever there are reports of divestment, which is what has kept investors hooked on to the stock despite the poor financial performance. While a divestment would be sentimentally positive, diversification out of thermal power is the key and that could take time even after divestment," said an analyst with a domestic brokerage house requesting anonymity.

In its post-earnings conference call, the Bhel management said that going forward, its focus will be on non-power businesses such as defence, railways and green hydrogen.

Analysts say that while these measures aid long-term revenue visibility, investors should not overlook short-term concerns such as softer execution and margin pressures due to rising commodity prices.

Also, with greater preference for renewable energy generation, the outlook for thermal power capacity addition in India remains bleak. This would keep Bhel’s order inflows muted.

Put plainly, there is no respite for the company from losses, at least in the near-term.

According to analysts at Edelweiss Securities Ltd, Bhel would require 1.3 times of its FY20 revenue to achieve its targeted break-even of 30,000 crore, which would require higher order intake than the current levels. “Silver lining—Bhel’s L1 status and sizable tender pipeline—but closure is key. Management is pinning hope on new avenues, but pace and opportunity size need better clarity and are key to re-rating," added the Edelweiss report.

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