BHEL scores hat-trick with better-than-expected results

Results were helped by Rs 20 crore of provision being written back

The year 2016-17 started on a strong note for Bharat Heavy Electricals Limited or BHEL; December quarter (Q3) results re-iterate that. Net revenues at Rs 6,325 crore increased 18.7 per cent year on year, even as BHEL swung from losses to net profit at Rs 94 crore in Q3 despite a 20 per cent fall in other income. The numbers were significantly higher than Bloomberg's revenue estimate of Rs 6,151 crore and net profit expectation of Rs 76.5 crore. This outperformance lifted BHEL's stock over five per cent on Tuesday. 

Except for employee expenses, operating costs are largely in check, thus boosting the operating profit margin to 3.5 per cent versus operating loss a year ago. Operating profit of Rs 224 crore includes Rs 20 crore of provisions write-back in Q3. Adjusted for this, the figure still manages to stay at 3.2 per cent. All these three profitability measures are ahead of expectations.

Equally interesting is the segmental performance. Power generation operations, which account for 79 per cent of revenue, posted 18 per cent year-on-year growth in revenues at Rs 5,096 crore. The division's Ebit (earnings or profit before interest and tax) margin at 11.5 per cent as against loss in the previous year indicates that BHEL is regaining its pricing power despite hangover from joint development undertakings. The industrials segment, which largely caters to private players, remains a question mark. While the segment's revenues grew 20 per cent year on year at Rs 1,369 crore, Ebit loss remained high at Rs 118 crore versus loss of Rs 97 crore a year ago. Another assuring factor is increasing base of executable orders. From the earlier forecast base of Rs 55,000 crore, executable orders for FY17 increased to Rs 77,000 crore. Rohit Natarajan of IDBI Capital says increasing base of executable orders will kick in operating levers for BHEL and improve earnings growth picture. That said, the sore point is its weak order inflows (Rs 1,700 crore in Q3). While the management is confident of bagging big-ticket orders in Q4, any miss on inflows could put future earnings under pressure.

Order flows from NTPC for replacement of its existing plants is another factor, as the opportunity size is huge. 

Also, while BHEL is improving its capabilities in renewable power, it needs to be seen if those can offset decline in thermal capacity additions. Hence, the wait for stock to reclaim its 2014 highs of Rs 250-280 may get long.