BHEL: Hopes of a recovery

The results posted on April 7 were an indication of what the Street could expect from Bharat Heavy Electricals Ltd (BHEL) for the March quarter. Therefore, the net profit announced on Friday for the quarter at Rs 360, down 60 per cent over a year, was no shocker. Net revenue, at Rs 9,792 crore, was down 26 per cent over a year, well below the Bloomberg estimate of Rs 10,786 crore. Operating margin is at an abysmal level of 3.7 per cent (19 per cent in Q4 of FY15). However, compared to the December 2015 quarter, when BHEL slipped into operating level losses, impacted by super-critical orders and provisioning for non-recoverable debt, a lot seems to have improved. While Q4, too, witnessed provisioning for debt, as other expenses stood at Rs 2,080 crore, the quantum of provisioning moderated (down 20 per cent over a year).

Net profit in the March quarter stood at Rs 360 crore, ahead of the Bloomberg estimates of Rs 307 crore. Other income at Rs 414 crore (including foreign exchange gain of Rs 123 crore), helped BHEL post profit ahead of the expectations. However, analysts were factoring for other income of Rs 300-400 crore and, hence, this might not disappoint the Street.

The key takeaways for FY17 were revealed to analysts at the quarterly conference call held on Friday. BHEL has emerged the lowest bidder (L1) in orders for 12,000 megawatts (Mw). Of this, 7,000 Mw of orders are expected to materialise in FY17. Its order book stands at Rs 1,11,000 crore. While this indicates good revenue visibility, Rs 50,000 crore of orders are in distressed projects. "Three projects are contributing to maximum stress," said Atul Sobti, chairman and managing director, in an analyst call. However, as elections are concluded in Tamil Nadu and environmental clearances are likely to come through in Telangana, he is hopeful that work on these three projects should commence. "If these start moving, the volume of stress is small", he stated. Sobti also said many projects from NTPC and state electricity boards are moving towards the non-JDU segment (joint development undertaking or super-critical orders to be executed in collaboration with foreign technology providers, such as Alstom and Siemens). This is positive for BHEL, given the operating margin pain in FY16 due to JDU orders. However, order inflow could just remain at FY16 level of Rs 43,000 crore. Analysts feel it is positive even if BHEL sustains its FY16 order inflow level, given the competition from foreign players.

However, even as the management sounds positive, Santosh Yellapu of Angel Broking remains a sceptic. "There could be more project write-downs, as some projects are non-moving. Also, decline in power values reduces the incentive to set up new thermal plants and this could impact growth for BHEL," he said. Kunal Seth of Prabhudas Lilladher, has similar sentiments. "Outlook continues to be weak due to deterioration in margin profile, aggressive pricing in market and risk of write-offs from stranded projects," he said.