BHEL: Execution challenges weigh on Q1 show

As power sector turnaround is 3-4 quarters away, near-term outlook remains subdued

Bharat Heavy Electricals (BHEL’s) numbers for the June quarter were a huge disappointment. The numbers aren’t up to the mark despite factoring in the fact that June quarter is generally a weak one and the Street did not expect much fireworks given the muted project execution scenario. Nevertheless, the company’s gross sales at Rs 4,501 crore came 15 per cent lower than the Bloomberg consensus estimates of Rs 5,322 crore. The net sales at Rs 4,281 crore declined 14.6 per cent year-on-year (y-o-y).

This decline in top line led the company to report losses at operating level as fixed costs weighed on the financials. The loss at the operating level of Rs 209 crore came against Street’s expectation of Rs 302 crore profit. Thanks to other income of Rs 492 crore, the company could report a profit of Rs 34 crore which declined 82 per cent y-o-y. Bloomberg consensus estimates pegged it at Rs 205 crore.

It was not a surprise that the stock lost around five per cent on the bourses, to close at Rs 266.80 a share. The company’s order book at the end of the June  quarter stands at Rs 1,16,200 crore against Rs 1,01,100 crore at the end of the March quarter. This increase was expected as the company had received its largest order worth Rs 17,950 crore for a 4,000 Mw power project from Telangana state.

The Street was hopeful of some improvement as the company announced the commissioning of a 330 Mw Hydro Power Station in Uttarakhand, 4x200 MW hydro stations in Himachal and 250 Mw Thermal station in Assam. This, coupled with large order inflow, had led to a 20 per cent run-up in stock prices during the past two months. Nevertheless, the June quarter numbers have taken away the euphoria, indicating the bottlenecks in project clearances at customer end was still keeping a lid on the overall project executions. Analysts are not too optimistic on near-term recovery. Prabhudas Lilla-dher analysts say execution is likely to remain under pressure, as there are Rs 25,000 crore worth of projects in the backlog. Execution is on hold as the issues are yet to be sorted. The boost from initiatives on coal auctions is likely to show results in three or four quarters.

To overcome the slowdown, BHEL, which has major presence in the boiler, turbine and generator segment, is also looking at orders in other segments such as transmission, solar, defence, railways, among others. However, it will take some time for benefits to accrue.

On the cost front, employee benefit expenses remain high (34 per cent to net sales in Q1). While FY15 saw 2,200 employees retire, Motilal Oswal expects another 700-plus to retire in FY16. Thus employee costs will reduce but gradually.

Given these factors, there might not be a significant recovery in the near term and this is reflected in the consensus target price of Rs 242 a share, based on 11 analysts polled on Bloomberg during July, prior to the results.