More power to BHEL

SMARTSHARE

If the government did not own approximately 67 per cent of Bharat Heavy Electricals Limited (BHEL), the navratna would probably be rewarded with a 20-25 per cent premium on its current valuation.

But if the power sector itself wasn't so massively dominated by the government (states and centre combined), the Indian economy as a whole would probably be generating an extra 1-2 per cent per annum in GDP growth.

Ifs and buts aside, BHEL falls into a peculiar category when it comes to companies operating in the power space. Several competitors, mostly private and with impeccable MNC parentage, also manufacture power equipment in India.

BHEL is organised enough technologically and in cost structures to compete in the domestic market. It is even good enough to compete globally on quality alone.

But since it's a government company, BHEL has often had to carry out contracts for bankrupt SEBs and suffered the usual long delays in payment.

The receivables position has improved in the recent past, however, and one has to assume that BHEL will always be a high inventory, high receivable, working capital-intensive business by its nature.

Also, since the government has no intention of relinquishing control, regardless of "creeping disinvestment" it will always suffer political interference.

The high growth, relatively high-margin area is services. BHEL booked around Rs 1,450 crore worth of business in the services segment in 2004-05, which is a 53 per cent jump, although it's still a relatively small slice of the Rs 10,686 crore 2004-05 total revenues in 2004-05 or the Rs 32,000 crore order-book.

Overall, 75 per cent of revenues (including some service revenues) come from the power sector and a very large percentage of that business comes from clients with, shall we say, "dodgy" payment records. Nevertheless, the growth in services is a very nice signal.

The brouhaha about a 10 per cent sell off is just a storm in a teacup, although it has a fair chance of proving a test case for the UPA's direction going forward.

The Left Front may be right for the wrong reasons. It would actually have a cogent argument if it pointed out that the current valuations are too low to make a 10 per cent sell off attractive.

But if we take this one step further, it is also true that the valuations will remain lower than the financials warrant while the Left Front has a say in the way the government deals with its stake!

The UPA's dependence on the Left is a prime reason why several navratnas are trading at lower-than-expected multiples. The only way that the government could realise "pucca" valuations would probably be to sell a strategic stake in BHEL and that was not on the cards even in the NDA heyday.

Broadly, BHEL trades at around 21 times 2004-05 PE. It has seen net profitability growing at better than 50 per cent and revenues growing at 22 per cent.

The OPM has improved from 17 per cent in 2003-04 to 18.9 per cent in 2004-05. BHEL has more orders than it can realistically service over the next two years and an incredible 0.1 debt:equity ratio.

If the government wasn't involved in management or a key client, the PEG for a company with those bare bones financials would be considerably better.