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?
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.