BHEL beats Street estimates

Intense competition and weakening margins continue to cloud outlook

In the June quarter, power equipment manufacturer Bharat Heavy Electricals Ltd (BHEL) beat the Street’s estimates marginally, but nobody’s cheering yet. The company’s revenues grew 16 per cent to Rs 8,439 crore, beating consensus estimates by 6.7 per cent. Net profit grew 13 per cent to Rs 921 crore, which again was ahead of the Street’s expectations. BHEL’s net profit has come ahead of estimates due to lower-than-expected interest costs, explains Rahul Kaul of Angel Broking.

While BHEL surpassed expectations on revenue and profit, the business environment continues to look cloudy, as competitive intensity is not likely to abate any time soon and order inflows are beginning to weaken. Vivek Mahajan, head of research at Aditya Birla Money, feels its order book position is likely to be under pressure, as the power sector is grappling with coal issues and competition is intensifying. “BHEL’s FPO (follow on public offer) is also likely to weigh heavily on the stock. We recommend to ‘avoid’ the stock till further clarity on power sector emerges and order inflows start picking pace,” he said.

A few analysts who are bullish on the stock believe the order inflow will remain robust, as NTPC will continue to order equipment from BHEL. Others believe while supply has increased due to Chinese and Korean players, demand has fallen due to project delays. Even the Cabinet’s decision to clear 21 per cent import duty on power equipment sourced from abroad would not help the sector much. The duty structure would be such that it would make Chinese imports costlier by six per cent. Given that the price differential between domestic and imported equipment is more than this, competitive intensity will not fall. According to MFSL Research, “A majority of the 12th Plan orders have been awarded and capacity addition targets do not include projects with a total capacity of 30,000-32,000 Mw — that have been stranded due to environmental issues. Also, order awards for the 13th Plan will begin only from FY14-15, at the earliest. So, we do not foresee any major demand pick-up immediately.”

The impact of competition is visible on margins, too. BHEL’s operating margins have fallen from 15.31 per cent to 14.25 per cent. The order book position, too, is a cause of concern to many analysts. It has an outstanding order book position of about Rs 132,900 crore at the end of the quarter, down 16.7 per cent year-on-year. Total market share in the super-critical turbine and boiler market is also expected to decline this year. While this is priced in, the market remains cautious.