 "Bhel at multi-year low: should you buy the stock?")
The state of Indian power sector is reflected in the share price of Bhel, which trades near the Rs 100 mark, close to its decade-low level. Although the government has taken steps to improve the health of the power sector by resolving the coal supply issues and bringing state governments on board to improve the financial health of state electricity boards, the efforts are not reflected on the balance sheet of the PSU giant.
Analysts have largely given up on the company, especially after its December quarter numbers. After the results, UBS cut Bhel’s target price from Rs 115 to Rs 70. Analysts have raised three main concerns about Bhel. Nomura in its analysis of the results has said the company has posted successive quarters of weak gross margin and its mounting receivables have touched nearly one year of sales.
As the majority of Bhel’s bids were placed for state/centre orders, Bhel has to implement a JDU (Joint Deed of Undertaking) so that its technology partner provides a warranty for the equipment. In return, Bhel has to source a certain proportion of equipment from its technology partner, thus leading to low gross margins, says Nomura.
On account of the poor state of the entire power sector, Bhel’s receivables have remained high. The company’s receivables stood at Rs 35,900 crore, more than its annual revenue of Rs 30,667.63 crore in March 2015. However, its management pointed out that about 50% of it is deferred debt which will be due for collection once certain milestones are achieved and the remainder are collectibles, of which over Rs 10,000 crore are more than a year old.
The third area of concern is on the order book. Kotak Securities says FY16 will be a strong year for Bhel with orders booked at Rs 28,300 crore and the company is L1 in about Rs 17,000 crore, most of which are expected next year. For the first nine month of the current fiscal, Bhel’s order inflow was Rs 35,000 crore which translates to around 9-10 GW of power equipment’s. JM Financial has pointed out that the company’s management hopes to end the year with 15-16 GW on inflows versus 4-5 GW in the previous year.
However, this high order inflow in front loaded and the rate is expected to go down in FY17 and FY18. Kotak Securities points out that post the visible order flow it is difficult to reasonably foresee the potential ordering pipeline with private capex likely to remain muted, NTPC and states’ major ordering is largely done, and UMPP (Ultra Mega power projects) ordering remains in a state of flux.
So what should one do with Bhel?
There is no denying the fact that Bhel’s best years are behind it. The company achieved its peak turnover of Rs 49,059.45 crore in FY13 with the present (trailing twelve month) run rate of around Rs 30,000 crore. Consensus estimates of analysts suggest that the company can touch a revenue of around Rs 36,000 crore by FY18. However, on a valuation basis the company is trading at a one-time sales basis. On a price-to-earnings basis, it is trading at around 10 times FY18 consensus earnings.
Bhel is a debt-free company and if the government’s measures of Make in India and other electricity reforms are to take off, the company is ideally positioned to capitalise on it. Though 80% of current revenue and order book is from power sector (largely generation), Bhel has taken other initiative to augment growth in future in the other segments.
Industrials which accounts for nearly 20% of the revenue and order book and caters to segment like power transmission, railways, water treatment, defence and solar is likely to see action in the near to medium future.
The government’s initiative of strengthening the state electricity boards through UDAY is likely to see order flows increasing in the transmission sector rather than generation. Bhel has significant presence in the field of power transmission in India with a wide range of transmission systems and products in its portfolio. The company is one of the leading players in transformers in the country and has started booking in big orders in the space.
In order to capitalise on the solar sector, the company is capitalising on its knowledge in the sector. Bhel manufactures space grade solar panel and space grade batteries in association with ISRO. All Indian satellites launched by ISRO are equipped with Bhel manufactured solar panels since 2002 and batteries since 2005. The company is planning to ramp up its cell & module production capacity and enhance EPC capabilities to address the domestic market demand.
In railways Bhel provides electrical propulsion system and its controls and accounts for more than 40% of electric locomotives in operation by Indian Railways. The company is augmenting its locomotive capacity and tying up with global companies to meet the increased demand from dedicated freight corridor.
Bhel is an established supplier for defence equipment. The company is working closely with various defence research institutes of the country to develop new products under the Make in India programme. It has also tied up to address the business opportunity of producing six submarines for Indian Navy.
While it is still early days for the industrial segment to provide the next leg of growth opportunity, but the Bhel is well placed to capitalise on the opportunity.
The company is available at less than its book value, with nearly half of its market capitalisation in cash as per last balance sheet. Dividend yield at current price level is still around 1.12 per cent thus giving some more room before it becomes very attractive.
