According to a JM Financial Services Ltd report, the next round of thermal capex is required only by FY23, implying another 24 months of stagnant order flows (Mint file)
According to a JM Financial Services Ltd report, the next round of thermal capex is required only by FY23, implying another 24 months of stagnant order flows (Mint file)

When will investors see light in Bharat Heavy Electricals’ stock?

  • Weakness in the power sector and limited capital expenditure (capex) in thermal power plants have tripped the rally
  • BHEL’s order flows dimmed to 23,000 crore in FY19 from 40,900 crore in FY18

When stringent cost-cutting catapulted net profit nearly 50% year-on-year in the March quarter of FY19, a ray of hope appeared for Bharat Heavy Electricals Ltd’s (Bhel’s) investors. The stock vaulted in response and is now 22% up from the mid-May level. Nevertheless, it is trending down again—slowly.What gives?

Weakness in the power sector and limited capital expenditure (capex) in thermal power plants tripped the rally.

A JM Financial Services Ltd report says that the next round of thermal capex is required only by FY22-23, implying another 24 months of stagnant order flows. Underutilized thermal capacity, with 25 gigawatts (GW) stranded for want of power-purchase agreements and another 48GW or so under construction, will take the plant load factor up from the present 60-65% to 70-75% by FY25.

Unsurprisingly, Bhel’s order flows dimmed to 23,000 crore in FY19 from 40,900 crore in FY18. One hope is that many projects, deferred due to elections in FY19, may see fruition in the current year.

On a positive note, the balance-sheet stress has been easing. Trade receivables receded slightly in FY19. Employee-benefit expenses have also stabilized after two years of increases.

Unfortunately, the drag from state electricity boards, which make up almost two-thirds of debtors, will not change soon. Also, a qualitative deterioration in customer profiles has been seen in the large order book of a little over 1 trillion.

The recent new orders pile pressure on working capital needs as they come with lower advances of 0-5% (10-15% earlier). So, a ramp-up in execution may bring revenue traction and the benefits of operating leverage. But the increase in working capital required and short-term borrowings may counter-balance these gains.

Fuelling the problem is heightened competition from domestic operators. “Even with peak inflows of 15–16GW a year, we see BHEL struggling to receive orders of even 7–8GW, despite the assumption of a 90% market share. This would lead to a sustained struggle to maintain margins with limited earnings-per-share growth potential," adds the JM report.

Given the overcapacity in the company and the sector, and Bhel’s lack of vision in diversifying risk, its market capitalization plummeted nearly two-thirds to 25,437 crore in the past five years.

The company’s return on equity has shrunk to between 2% and 4%, from FY16 and FY18. Besides, to steer this power-sector juggernaut into new areas such as renewables would take a while. In this backdrop, it isn’t surprising that the Bhel stock is running low on power.

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