BHEL: Worst fears coming true

Shrinking order book a cause of concern, revenues and profit may contract in FY13

The power sector’s woes are taking the wind out of Bharat Heavy Electricals Ltd (BHEL). The government may have taken measures to sort out the finances of state electricity boards and discoms, but there’s little that has been done to ensure coal supply. Faced with an acute shortage of coal, many power producers are expected to cancel the orders for power equipment they had placed with equipment manufacturers like BHEL. Order cancellations are now becoming a reality for the company, explain analysts.

While fresh order inflows are at Rs 400 crore, its order book has fallen eight per cent sequentially and 24 per cent year-on-year (y-o-y) to Rs 1,22,300 crore. The company’s segment-wise performance shows the industry segment has been worst hit. The industry division reported a revenue decline of 31 per cent y-o-y and earnings before interest and taxes (EBIT) fell 45 per cent y-o-y. The power division reported a revenue growth of 15 per cent and EBIT growth of 34 per cent y-o-y with segment EBIT margin at 19.7 per cent, up 290 basis points y-o-y.

The current set of numbers indicates BHEL will close the year with a contraction in revenues and profits. The sector’s fortunes are unlikely to look up in a hurry, as there’s little clarity on how coal production will increase over the years. Also, analysts expect many power generators to cut back on planned capacity, as fuel linkage issues are unlikely to be sorted out soon. This was the worst risk for BHEL and this quarter’s numbers seem to indicate some of this is playing out already. The company’s revenues have grown by a modest one per cent y-o-y to Rs 10,600 crore on a declining order backlog. This trend is likely to continue, say analysts.

What has come as a positive surprise amidst a series of negatives is margin stability. Analysts say core margins have stayed steady at 18 per cent in Q2. At the start of the year, BHEL had expected fresh order inflows of 14,000-16,000 Mw and most of this was to be driven by NTPC. However, it has seen order inflows of 2,000 Mw in the first half. The company, analysts say, has run into a wall and this downhill journey is likely to continue for the next couple of years at least.