BHEL's share in fresh orders only 1% in second quarter

Expected to be one of the worst performing Sensex companies, with lack of orders and execution slowdown

The performance of Bharat Heavy Electricals Ltd (BHEL) in the second quarter of FY14 is set to drag down the revenue and profit growth of benchmark indices, as the company continues to battle structural challenges.

Though there has lately been positive news on the capital goods sector and order inflow has shown a pick-up, BHEL is not a beneficiary. In the second quarter, general order inflows picked up to Rs 38,569 crore, up nine per cent annually and 23 per cent sequentially. This is the highest order inflows seen by the sector in two years but BHEL's share is an abysmal one per cent of this, says Sharekhan. Larsen & Toubro (L&T) has cornered 66 per cent of these orders.

Shares of BHEL rose 43 per cent, after touching a low of Rs 101.50 in August, on expectations that the company could get new BTG (boiler-turbine-generator) orders from ultra mega power projects (UMPPs).

The market believes the risk of foreign competition has abated substantially and the rupee's depreciation would help. The other factor that contributed to the share price rally was the notification of a standard bidding document for case-two bids, with fuel cost as pass-through and approval of the coal block auction policy by the government.

However, analysts believe operational challenges faced by BHEL continue. ICICI Securities believes while foreign competition might not be a threat, domestic players have queered the pitch, as 30-35Gw of BTG capacity is already awaiting fresh orders.

Further, incremental ordering is likely to be weak, unless the current issues are addressed. The power sector is battling multiple issues, from fuel shortage to dues from state electricity boards. Analysts believe till these are resolved, BHEL might not see meaningful recovery. Also, slower capacity addition in the sector could impact its order inflows in the coming quarters. Analysts expect a decline in earnings per share of 21.2 per cent compound annual growth rate (CAGR) over FY12-15. In the second quarter, some analysts expect BHEL's revenues to decline 17 per cent year-on-year, though there might be a healthy pick-up sequentially.

The operating margin is also expected to decline by 770 basis points between FY13 and FY15. The market is not very keen on BHEL taking over troubled projects, which could add to the company's balance sheet stress. Macquarie Capital believes BHEL could see sharp earnings downgrades after Q2.