BHEL forecast stumbles on reality

June quarter sees plunge in orders, sales & scrip; turnaround needs lift in sector outlook

When Bharat Heavy Electricals Ltd (BHEL) announced its annual results for 2012-13 on May 23, Chairman B Prasad Rao surprised the audience by claiming fresh order inflows had jumped 43 per cent to Rs 31,528 crore. This came as launches of new power projects were at an all-time low. Rao further built on positive sentiment with expectations of continued orders from the public sector in the near future.

Less than three months since, that bubble of positivity and assured growth has burst. Fresh orders dipped 80 per cent to Rs 1,500 crore in the first quarter ended June. Net profit fell 50 per cent to Rs 465 crore and net sales declined 24 per cent to Rs 6,352 crore. Accordingly, the share price tumbled 24 per cent within two days, to close at Rs 120.9 on Monday. The government also shelved an earlier plan to offload five per cent stake in the company, owing to the low market valuation and bad order book position.

 

A look at key figures reveals the bubble was based on a low base of order inflows, at Rs 21,000 crore in 2011-12. In fact, the company had witnessed annual order inflow of around Rs 60,000 crore in each of the three financial years preceding 2011-12. So, the figure for 2012-13, announced with much chest-thumping, was still a four-year low. As for the June quarter, even public sector orders dried, owing to a general slowing in award of new projects.

A senior company executive said the dismal June quarter performance shouldn’t be a surprise. “Historically, BHEL has always grown at (no more than) two to three per cent. The high growth in capacity addition and investments in the past some years had inflated expectations. Though, the growth can never be as bad as it has been in the first quarter this fiscal. No significant orders came to spruce the numbers,” he said.

The executive said the initial projections of high growth during 2013-14 were based on the expectation that new power projects would get finalised quickly. “We had anticipated orders from new projects will flow in. Unfortunately, the whole decision-making process in the sector has slowed. Funding has become expensive and promoters are sitting on investment plans,” he said.

The good news is, the company still expects to procure at least 47 per cent of the estimated Rs 80,000-crore worth of orders from a pipeline of 11,000 Mw of new capacity to be announced later in the year. However, for the new orders to strengthen the shrinking operating margin, the company will have to act quickly to settle the dues of a little over Rs 40,000 crore from customers. “These receivables have refused to come down from where they were in April. This is because the bulk of this is deferred debt, linked to BHEL achieving project milestones,” the executive said.

The increase in import duty on power equipment to 21 per cent, announced last year to cut competition from Chinese manufacturers, has not helped much. “The gain has been offset to a large extent by the recent depreciation in the rupee. As much as 32 per cent of our input cost is based on imported material,” the executive explained.

One reason why BHEL has been losing orders to Chinese companies is product mix. The latter specialise in supplying higher-size supercritical units, of 660 Mw and above; BHEL continues to stick to 270-500 Mw subcritical units. Time of delivery and cost are two other factors. BHEL supplied around 25,000 Mw of power capacity commissioned in the past Plan period (2007-12), while non-BHEL equipment commissioned was 28,000 Mw.

The new orders of close to Rs 38,000 crore expected to be grabbed this financial year will help BHEL bridge a part of the order shortage problem but any meaningful turnaround in growth would require improvement in investor sentiment in the power sector, leading to launches of new projects. BHEL had an order book position of Rs 108,600 crore as on June 30, lower than the Rs 115,160 crore as on March 31 and Rs 122,300 crore on June 30, 2012.