BHEL's recovery may be steady but slow

Operations have become profitable in FY17 after three years of losses

After posting good results in the quarter ended March 2016, expectations were high on BHEL. But, much to the Street’s disappointment, BHEL’s March quarter (Q4) performance lagged estimates significantly — revenues were at Rs 9,833 crore (down six per cent year-on-year or y-o-y) and net profit at Rs 215 crore (down 57 per cent y-o-y). 

Revenue growth was stunted as the performance of the industry segment (constituted by orders from private power producers) fell by 21 per cent y-o-y to Rs 1,765 crore. Even that of the power segment (mostly catering to state-owned thermal plants) grew only three per cent. 

A sharp rise in other expenses (Rs 2,660 crore; up 61 per cent y-o-y) — mainly due to provisions made for impending wage hikes — dragged down the operating profit by about 40 per cent in Q4. Order inflows also shrunk by 47 per cent y-o-y in FY17 to Rs 23,200 crore. While these were the major disappointments which dragged BHEL’s stock down by around nine per cent to Rs 140 on Tuesday, it may not have been entirely factored in.

Revenues of the power and industry segments grew by 10 per cent and three per cent, respectively, in FY17, which is a positive as the performance has rebounded after three years of dismal show till FY16. Also, the operating margin at 6.7 per cent saw a sharp improvement from year-ago levels of 3.5 per cent. While these margins may not be sustainable if BHEL were to execute the joint development orders which require foreign collaboration, even if margins are maintained at six-seven per cent in FY18, it is positive.  

The progress with slow-moving projects, mainly the ones at Manuguru and Yadadri worth Rs 23,000 crore, offers comfort on execution and profitability in FY18. BHEL has also received a go-ahead for its Bangladesh project (Maitree Power), thus bumping up the revenue visibility to nearly Rs 33,000 crore in the current financial year. BHEL is also the lowest bidder for projects worth 3.66 gigawatts (Gw). The company is shifting focus to emerging opportunities such as solar power, railway (mainly locomotive engines) and defence, helping to secure long-term relevance at a time when greenfield opportunities in coal-fed plants are shrinking.

BHEL has increased its annual manufacturing capacity of solar panels to 105 megawatts (Mw) and solar modules to 226 Mw. Investors should also keep an eye on replacement orders from NTPC, which could potentially lift the order book by 22 Gw. 

While these orders can boost revenues by Rs 4 crore for every Mw of replacement, the timing of these orders remains uncertain. This is why even if the prospects look comfortable, the inability to predict the timing of the order may delay the pace of recovery. Therefore, analysts have mellowed down their expectations. Motilal Oswal Financial Services has cut its FY18 revenue estimates by 23 per cent; Kotak Institutional Equities has slashed its FY18 net profit target by 31.5 per cent.