BHEL could be headed for a big turnaround if it can resolve its receivables

A significant 76% of these orders are from conventional power generation projects, primarily thermal. But the rest are from diverse sectors like renewable power including large pumped hydro storage, the power transmission & distribution sector, defence-related orders such as naval guns, and also orders from the Indian Railways where BHEL has Vande Bharat trainset contracts in collaboration with Titagarh Wagons. Emerging markets like data centers, nuclear steam turbines, electric vehicle infrastructure, and green hydrogen are also part of their portfolio. In the thermal projects market, BHEL and L&T form a near-duopoly, with an anticipated 25-55 GW of thermal expansion on the cards for the next five to seven years or so, ensuring a steady flow of orders.

BHEL's substantial order backlog and expected order inflows make for a compelling investment case, reflecting in the near doubling of its stock price over the past year. However, challenges remain.

For one, BHEL has racked up significant losses over the last two quarters. It declared a ₹238 crore net loss on net sales of ₹5,125 crore in Q2FY24. It had reported a modest ₹12 crore net profit on ₹5,202 crore of net sales in the corresponding Q2FY23, primarily due to ₹211 crore in tax refunds. In Q1FY24, losses stood ₹344 crore, with net sales of ₹5,003 crore. The losses in the first of half of FY24, at ₹582 crore, are more than the net profit of ₹477 crore in the whole of FY23.

Another issue is the high receivables, standing at about 580 days as of end of September, indicating a working capital requirement of roughly ₹23,000 crore. Over ₹8,000 crore is pending from completed projects. Part of the problem is that several of the ongoing power project contracts have back-ended payment structures. 

However going forward, the project payment structures are more rational and working capital needs should ease substantially within two years, according to optimists. The pessimists will point to the fact that project activity has also been slow in many instances, and tardy execution would place even more stress on finances.

In a nutshell, the company has a huge order book and the promise of more orders through the next several fiscals. However, it has very high receivables and associated working capital needs. If BHEL can accelerate the pace of order completion, and simultaneously reduce working capital needs substantially, it could see a remarkable turnaround. If it doesn't, it could end up with much more red on the balance sheet.

BHEL has seen changes at management level, including a new chairman and managing director appointed in 2023 – he was head of operations earlier. It will take determination to turn around the company. The stock movement suggests that the Street consensus is positive. There are several analysts who have negative targets however, suggesting that there could be a big downside.