Pain far from over for BHEL

Bharat Heavy Electricals (BHEL)'s December 2015 quarter results, announced on Thursday, snatched away hope of any near-term recovery, and were below estimates. For a 16th consecutive quarter, BHEL recorded a fall in revenue,at Rs 5,230 crore, a level previously seen in the June 2014 quarter. What's worrisome is the sharper decline in gross margins (revenues less raw material cost) at 36 per cent; down 300 basis points (bps) over a year, despite lower commodity prices.

Depressed gross margin indicates the continued competitive pricing environment and cost pressures due to super critical orders or orders requiring joint development undertaking (JDU). Under JDU, which now accounts for 45 per cent of the total order book (about Rs 1.1 lakh crore), BHEL is required to collaborate with foreign technology providers such as Siemens and Alstom. The raw material import component is high in these orders, and margins are relatively lower.

Order book in the third quarter of the current financial year is lower sequentially, if Rs 3,700 crore of orders, which are unlikely to commence, are to be excluded.

The bigger pain is the provisioning of Rs 1,186 crore in the December 2015 quarter towards irrecoverable receivables and inventory. The first of its kind, analysts brace themselves for more provisioning as BHEL's outstanding recoverable stand at Rs 35,900 crore, of which Rs 17,950 crore are deferred receivables, where timely fulfilment of milestones will be critical. Tarang Bhanushali of IIFL while viewing the provisioning as necessary, says he is not sure if the provisioning in the quarter is a one-time clean-up or whether more stress might be expected.

Positive take-away from the quarter is the revival of five projects (constituted by private players) totalling to Rs 2,000 crore. With this, the stranded order book falls to Rs 32,600 crore in the quarter.

BHEL's stock price has been hammered down by 40 per cent since January on earnings concerns. Thirty out of 47 analysts polled on Bloomberg recommend 'sell' on the stock. Though much of the negativity is priced in, environmental clearance for the Telangana project (5x800 Mw) could provide some cushion.