BHEL: Positive signs, but still early to rejoice

Recent commissioning of projects good news but bottlenecks remain as BTG market yet to show uptick

BHEL’s improved order flows and commissioning of some projects in the recent past have led to renewed interest in the stock, which hit a three-month high on Thursday.

The company bagged its largest-ever order worth Rs 17,950 crore to set up a 4,000-Mw power project from Telangana state. It also commissioned a 330-Mw hydro power station in Uttarakhand, 4x200 Mw hydro stations in Himachal and a 250-Mw thermal station in Assam.

The order gains are indeed positive, given that order inflow has remained tepid, and revenues have declined and profits halved during FY15. The order book, as of March 31, 2015, stood at Rs 101,100 crore, almost flat year-on-year.

Thus, BHEL’s stock price, after trending down from its 52-week high of Rs 299.50 in February to closing low of Rs 222.65 in May, has showed some traction.

While more orders might follow, execution holds the key. This is one reason analysts are cautious as a result they believe further upside for the stock could be limited.

Analysts at UBS say 5.1 Gw out of 5.9 Gw orders could likely take two years to start execution. Unless execution picks up, revenue and profit growth will be impacted further.

 

Analysts at Citi say execution is improving, but add that it is being pulled down by stranded projects. It is due to Rs 25,000 crore worth of stranded projects in the backlog that execution is on hold as various issues (at customer end) are yet to be sorted out.

Consider this: BHEL had bagged shorter delivery timeline projects in Telangana, including the 1,080-Mw Manuguru project (24 months) and the 800 Mw Kothagudem project (36 months) in December 2014. However, even for Kothagudem closest to being awarded environmental clearance, the proposal is yet to be considered by the Environment Appraisal Committee.

Similarly, in the case of   Manuguru, the terms of reference are yet to be approved. However, even after the terms are approved, it could take 1-3 years for environmental clearances before the project can be started, say analysts at UBS.

To overcome the slowdown, BHEL, with major presence in the boiler, turbine and generator (BTG) segment, is also looking at orders in segments such as transmission, solar, select defence orders, etc. However, it will take some time for benefits to accrue.

 

Operationally, while staff costs continue to decline (eight per cent in FY15) and should fall further in FY16, BHEL is also cutting other costs. However, for the bigger gains, execution bottlenecks have to ease and BTG capex has to pick up. The boost from initiatives on coal auctions, etc, is yet to show results, say analysts.

Analysts at Citi, more positive on BHEL, have a price target of Rs 271, while that of UBS and Normura’s is at Rs 200 and Rs 241, respectively, for the stock which is trading at Rs 251.