BHEL: Execution to remain sluggish as power projects await clearances

Near-term order visibility to come under a cloud as Street expects Telangana orders to see delays

Bharat Heavy Electricals Ltd (Bhel) shares have risen 14 per cent over the past month. Though the quarterly performance continues to show strain, most of the stock’s performance has to do with expectations of a turnaround in order flows. As is the case with many large-cap stocks, which have run up significantly on an expected revival in the economy, the Street’s view is turning cautious. The company’s earnings were expected to return to positive territory, after declining 35 per cent over three years. The formation of Telangana was said to be a turning point, as Bhel signed a memorandum of understanding (MoU) for 6 Gw with the state.

The ride is not going to be as smooth as anticipated by the Street. For starters, earlier this month, the Tamil Nadu Electricity Board is said to have scrapped the tender for the Udangudi Power Project, where Bhel was the lowest bidder. The bids were invited in 2013 and opened last year.

According to Barclays, a new tender is expected to be released but finalisation is now likely in FY16, given the typical timelines for tender to order conversion. The brokerage does not expect this to impact its FY15 order inflow estimates but the event reduces near-term visibility on an order in which Bhel was L1 (lowest bidder).

Kotak Institutional Equities is of the view that of the 6 Gw Telangana MoU Bhel has with the state, 800 Mw has been awarded and the 1.1-Mw Manuguru project will be awarded in FY16. Kotak believes there is no project preparedness for the remaining 4 Gw and it is unlikely to be ordered in the medium term.

In addition, clearances for other power projects are still in the works. NTPC’s Khargone, Barethi and Katwa projects are all in the process of seeking environmental clearances. For all the three, Kotak says, tenders were issued in 2014 for award of BTG/EPC contracts and two had professedly declared L1 bidders. Of these, one contract is apparently cancelled (Katwa-Doosan) and the fate of another (Khargone-L&T) is not known. The market is also concerned about employee costs rising once the Seventh Pay Commission is applicable from January 2017. Analysts expect this to have an impact on the company’s employee costs to sales ratio.

The company's financials are expected to improve from FY17 onwards when companies get coal linkages and projects get off the ground.