Bhel: Starved for action

The company’s order book is packed but customers don’t seem to be moving ahead on projects.

With a disappointing top line growth of just 21 per cent y-o-y in the December 2008 quarter, the rise in Bhel’s revenues for the first nine months of 2008-09 has been dragged down to 31 per cent.

What’s more the engineering behemoth’s profits for 2008-09 could turn out to be unexciting because the net profit in the last quarter was up just 2.4 per cent per cent y-o-y at Rs 791 crore. As of now, analysts expect the company to clock a growth in net profits of about 15-16 per cent to Rs 3,300 crore, despite revenues being up by 25-30 per cent to around 27,500 crore.

Will 2009-10 be a better year for Bhel? It’s hard to tell because much would depend on how well the economy does. At the end of the day, it’s not enough to have orders, they need to be executed.

What’s happening currently is that although the order book is packed, customers seem to be taking their time implementing projects, possibly because they’re strapped for funds. That’s a pity because at the end of the December 2008, the company had orders worth just over Rs 1.1 lakh crore which is around five times last year’s sales. Unless, customers decide they’re moving ahead with their projects though, much of these will remain on paper.

Also, while most of Bhel’s orders are from government agencies such as NTPC, which makes payments on time, there are other customers such as some state electricity boards, who do not. A recent report by Deutsche Bank noted that “the financial condition of state electricity boards is possibly worsening”. Average cash collections for SEBs were marginally lower in 2007-08 th n in previous years. That cannot be good news for Bhel because it could end up spending more on interest if payments are delayed.

On the profitability front, the operating profit margin for the December quarter came off by 320 basis points to 17 per cent thanks to the higher cost of raw materials and employee costs (Sixth pay commission recommendations). With commodity prices falling, the raw material bill will be smaller next year and that should boost margins.