Execution is not expected to pick up in the near term. Working capital levels are likely to remain elevated
The biggest concern for investors is BHEL’s negative operating cash flows
After tumbling 46% in the past year, shares of Bharat Heavy Electricals Ltd (BHEL) hit a 52-week low of ₹33.4 last week. Lights seem to be dimming on this capital goods manufacturer as cash burn remains high. Poor order flows, weak execution, high receivables and working capital requirements continue to daunt the state-run company.
The biggest concern for investors is BHEL’s negative operating cash flows. This is partly because nearly half of its order book accrues from state government projects, where payment receipts are challenging.
Given the slowdown and liquidity crunch in the economy, execution is not expected to pick up in the near term. Working capital levels are likely to remain elevated. Therefore, net cash of BHEL is depleting. Nomura Financial Advisory and Securities Pvt. Ltd, said: “Net cash levels have fallen from ₹5,000 crore in FY19 to just over ₹1,200 crore in the nine months of FY20. This is a concerning trend, and unless there is substantial improvement in working capital levels, we estimate that BHEL may turn net debt (positive) by end of FY21."
The de-rating in the stock price is not surprising, considering that a key investment rationale for BHEL shares has been its cash-strong status, despite the odds.
Sadly, even the December quarter results brought no relief. Net revenue dropped 23% year-on-year (y-o-y). Power sector revenue fell 26%, while that from the smaller industry segment dropped 14%.
Fortunately, strong cost-cutting measures gave a leg up to earnings before interest, taxes, depreciation and amortisation (Ebitda), which jumped 50%. However, the firm operates on wafer-thin profit margins. Ebitda margin, which improved by 280 basis points (bps) is hovering in single digit (5.8% in the December quarter).
The bane is the high-interest cost that vaulted 141% y-o-y, which obviously is a drag on the bottom line.
Adding to its woes is weak order flows. Analysts estimated FY20 order flows at ₹30,000- ₹40,000 crore. A report by JM Financial Services Ltd said: “Although order basket for FY21 appears promising at ₹40,000 crore, it is mainly due to many orders getting postponed from FY20 into FY21, while the annual run rate of ordering has shrunk from 9-10 gigawatts to 5-6."
The Street has pencilled around -15% compounded annual growth rate (CAGR) between FY19 and FY21.
Therefore, at ₹33.7 apiece, BHEL’s stock trades at 15 times the estimated earnings for FY21, leaving little room for upsides. Only a turnaround in the economy or execution ramp-up could save the stock from further doom.
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