Bhel turnaround story gathers momentum

Order execution is gaining pace and share of slow-moving orders is declining

In June quarter, when Bharat Heavy Electricals Ltd  (Bhel) said it expected execution to pick up in FY17, there were only a few takers. But, in September quarter (Q2), when revenues sustained 12% year-on-year growth at Rs 5,941 crore, analysts are beginning to take note. This explains why the Street’s sentiment is gradually picking up. There are more analysts recommending 'buy' or 'hold' now — 15 against 12 last month. 

Revenues grew 12% year on year in Q2FY17 mainly on pick-up in pace of order execution. This is also helping Bhel improve its operating margins. After dipping into the negative zone last year, operating profit margins came in at 1.3% in Q2. The power division, which saw 10% growth in revenues (Rs 4,755 crore) in Q2, supported margin expansion (9.6% versus drop of 0.4% in Q2FY16). The industrials division, where Bhel largely caters to private power generators, is yet to improve in terms of realisation. With revenues of this division up 15% year on year to Rs 1,526 crore (10% sequentially), a few slow-moving projects are gaining traction in the private sector. 

Better execution is helping in efficient absorption of costs. Operating expenses in Q2 grew 2%. The quarter witnessed provisional write-backs amounting to Rs 37 crore, helping Bhel’s profit in Q2. In short, the takeaway from Q2 results is the progress on slow-moving orders, improving the operational efficiency. Among slow-moving projects, Ennore plant (1,320 megawatts or Mw) has become executable and will reflect in FY18 earnings. Likewise, Bhel expects resolution on Yadadri project (4,000 Mw). The only major pain point is the Manuguru plant (1,080 Mw), which faces the risk of environmental clearances not coming. Also, Bhel expects orders worth Rs 60 crore from Indiabulls Power to be cancelled. However, factoring in for these, analysts expect revenues to increase 18.5% in FY17 and 14% in FY18. 

Order inflows in Q2 reduced 13.5% year on year to Rs 2,000 crore. But, with the order backlog at Rs 1,03,316 crore, it gives adequate revenue visibility for at least four years. Analysts at ICICI Securities believe decline in order backlog to be arrested by FY17 as Bhel is comfortably placed for orders worth 12 gigawatts in FY17. 

In addition to this, its diversification plans to offset the muted outlook for coal-fed power plants should help Bhel realise revenues from its recent ventures such as solar power plants, sewerage treatment, and defence, in the next two years. With these factors adding up positively for Bhel, Tarang Bhanushali of IIFL upgraded his recommendation on Bhel from 'reduce' to 'accumulate' following a revision in target price and recent correction after the June quarter results.