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BHEL’s stock price reflects what the market thinks of its performance. After reporting a 58.4 per cent drop in its net profit, share price of BHEL is down 8 per cent with continued selling. Most of the brokerages covering the stock have suggested to their clients to reduce position or shift to better stocks.
Morgan Stanley, consistently negative on the stock had earlier called for a three ‘M’ de-rating on BHEL – market share, margins and multiples. The first stage has already played out with market share losses to both foreign and domestic competition, leading to part of the third driver (multiple) also playing out. The second stage of the de-rating continues – EBITDA margins were down 190 basis points YoY to just 2.6 per cent in the June quarter (the 7th consecutive quarter of decline and second lowest level in 10 years), and more pain is expected to follow. Edelweiss says that margins were impacted by 670 basis points dip in the industry segment, which faces competition from smaller vendors and Chinese players.
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BHEL’s revenue declined by 20 per cent in the June quarter, but more importantly its order book continues to decline. It reported order inflows of Rs 1,100 crore which prompted Citi to issue a warning that the company’s order book has dropped below Rs 1 trillion mark and may have dipped below the 2009 mark. Citi adds that the company may miss its sales and order book guidance for the current year.
However, there are some brave broking firms who are maintain a ‘Buy’ on the company. Satyam Agarwal of Motilal Oswal recommends adding the stock with a price target of Rs 300. Agarwal expects order flow to pick up during the current fiscal and the reason that order flows was low in the June quarter was on account of elections. No new projects have been ordered in the current fiscal. However, Kotak Securities says that BHEL’s management has indicated early signs of revival based on the new government’s policy actions.
BHEL’s order pipeline remains strong at 16-17 GW led by the public sector. The company is favourably placed for orders worth 4GW, with another 4GW under evaluation, says the Kotak report. However, the broking firm has a ‘Sell’ recommendation on the company.
BHEL will need to increase its order book as sales once again have outstripped order inflow. Visibility of sales has fallen down to 2.6 years. Agarwal of Motilal Oswal feels that order visibility will increase to three times in the current fiscal.
In the post result conference call, BHEL’s management said that execution is likely to improve, with projects even in the private sector like Lalitpur, Bara, Monnet, etc seeing some pick-up. Also for new intake, the company is offering a lower execution period, and management expects projects particularly in Andhra Pradesh / Telangana, etc to avail this.
Not many analysts seem to be convinced by the management response and feel that the uptick in the power sector and new business from other sectors is likely to be a time consuming affair.
It is apparent that we are back to where we were before the elections in the case of BHEL and power sector. The company and the sector is completely dependent on the power sector reforms to take off. However, as an earlier Business Standard report pointed out, the power minister Piyush Goyal is still in the learning phase. The current Parliament session did not witness any Cabinet decision related to reforms suggested for the power sector. The wait for a major overhaul of the sector as well as for BHEL has just got longer.
