The stock therefore opened lower at  ₹54 and continues to move in a tight range, mirroring investor uncertainty on its prospects. (Bloomberg)
The stock therefore opened lower at 54 and continues to move in a tight range, mirroring investor uncertainty on its prospects. (Bloomberg)

Bhel’s poor execution, high working capital point to stress in power sector

  • While this hit revenue and profit growth in the September quarter, its focus on cash collections is noteworthy as is its order flow growth
  • Overall revenues fell 8% y-o-y in Q2 FY20. This was about 10% below Bloomberg’s consensus estimate

Bharat Heavy Electricals Ltd’s (Bhel’s) woes continue to mount. The deplorable state of the power sector has been hampering execution and cash flows of the power equipment maker.

Land acquisition delays coupled with slower customer approvals and payment delays have dragged down its power segment sales by 18% year-on-year (y-o-y). Some relief has come in the form of a 24% y-o-y growth in its industrial segment sales.

Graphic by Satish Kumar/Mint
Graphic by Satish Kumar/Mint

Nevertheless, overall revenues still fell 8% y-o-y in Q2 FY20. This was about 10% below Bloomberg’s consensus estimate. According to a note by SBICAP Securities Ltd, “BHEL is trying to optimise execution and cash collection from projects as working capital remains a concern." This stymied revenue growth in the last few quarters.

While overall debtors remained flat, inventory levels increased in the first half of FY20. “Working capital deteriorated to 78% of sales by end-September from 65% in the corresponding year-ago period. This is due to a rise in inventories, slow movement in receivables and poor execution," Motilal Oswal Financial Services Ltd said in a note.

The behemoth also faces a challenging receivables cycle, which is exerting pressure on free cash flows. In an earlier report dated June 2019, Edelweiss Securities Ltd pointed out, “BHEL’s balance sheet and cash flows are unlikely to revive meaningfully with state electricity boards accounting for more than 50% of receivables."

A sizeable order book of 1.1 trillion is doing little to alleviate revenue growth concerns. Weak operating leverage, high raw material costs and unfavourable product-mix took a toll on gross margins that fell 410 basis points .

Lower provisions, however, buoyed Ebitda (earnings before, interest, tax, depreciation and amortization) margin by 74 basis points to 4.3%. This was a relief as it surpassed Bloomberg’s forecast. Ebitda rose 11% y-o-y to 267 crore.

Amid this gloom, the 44% jump in order flows from the year-ago period of 7,400 crore sparked some positivity. “The management indicated good order prospects, apart from a strong L1 ( 2,100 crore). It also remains upbeat about opportunities in emission control, railway locomotives, and renewables," said the SBICAP note.

Even then, investors barely showed interest. The Bhel stock fell 1.4% on Thursday, underperforming the BSE Capital Goods index and Sensex. In addition, the firm would face structural growth challenges given the emergence of renewable energy such as solar power. Not to forget that weak thermal power consumption would continue the demand-supply mismatch at least for a couple of years ahead.

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