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Analysts expect the financial stress for BHEL to continue unless it forays into other segments.
Analysts expect the financial stress for BHEL to continue unless it forays into other segments.

With bleak thermal power prospects, BHEL faces more pain in long run

Analysts said the financial stress for Bharat Heavy Electricals will continue unless it forays into other segments

An increasing preference for renewable energy amid high exposure to thermal power has become a major cause of the consistently disappointing earnings of power plant equipment supplier Bharat Heavy Electricals Ltd.

BHEL posted a standalone net loss of 556 crore in the September quarter, against a profit of 118 crore for the same period last year. The loss was worse than Bloomberg’s consensus estimate of 239.80 crore. Revenues were lower than expected as well, declining by around 40% year-on-year (y-o-y) to 3,695 crore in Q2FY21.

Order inflows halved y-o-y to 3,720 crore and the order book was flat at 1.1 trillion. Total receivables saw a marginal decline annually and sequentially, but remained elevated at 34,900 crore in Q2. State-owned companies accounted for 48% of the total receivables, the management said. It was followed by the Centre (33%), private players (12%) and exports (7%), it added.

Stress factor
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Stress factor

BHEL continued to report losses at the operating level in the September quarter. The operating loss has narrowed sequentially, but was higher than forecast. Lower employee costs helped reduce operating losses, analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a report on 10 November. However, BHEL’s Ebitda loss at 633 crore was significantly higher than their expectation of 499 crore and consensus estimate of 212 crore, said the report.

Wage inflation has also eaten into the gains from fewer employees.

“BHEL has an employee base of around 34,000 and employee cost formed 18%/25% of sales in fiscal year 2019/fiscal year 2020. While we appreciate that the company has been able to bring down the employee base from 46k in FY10, wage inflation has negated the benefit of the same," said analysts from Motilal Oswal Financial Services Ltd in a report on 9 November.

Moreover, declining revenues imply lower absorption of fixed costs, hurting profit margins.

“Thus, BHEL posted Ebitda-level loss in FY20, from 16-20% Ebitda margins in the good years (FY04-13)," the domestic brokerage pointed out.

Analysts said the financial stress for BHEL will continue unless it forays into other segments. The company is trying to diversify, but the benefits are not expected soon.

BHEL had floated a global expression of interest to leverage its manufacturing capabilities and facilities. The company has signed three memorandums of understanding with international majors for defence and armoured trucks, according to the its presentation to investors.

“BHEL’s dependence on thermal power, including supply of captive power plants in the industrial segment, is >80% of sales over the last five years. We estimate thermal power to be in a structural weak phase over the next decade. The management is focusing on diversifying into contract manufacturing, defence and transportation, but efforts may take years to materialize," said the Nomura report.

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