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There is nothing good to say about BHEL’s June quarter results. The net sales were down by 24 per cent to Rs 6,352 crore, operating profit margins tumbled 823 basis point to a mere six per cent and net profits plunged 50 per cent to Rs 466 crore (despite a sharp rise in other income), compared to the year-ago quarter.
The stock fell 19 per cent to Rs 121, after the results announcement on Saturday. Though the stock is at its seven-and-half-year low and valuations look attractive, the share price may fall further. However, the subdued valuations also mean any further decline in the price may not be substantial.
While the fall in net sales in the quarter indicates the issues BHEL is facing on execution (delays in projects of customers due to lack of clearances, fund and fuel availability, etc), the fall in margins is consequent to high fixed costs.
On the other hand, growth visibility is inching lower. Though the management is sticking to its FY14 forecast of flat revenues citing improvement in liquidity and clearances, when probed, they accepted precarious ground realities, wrote Ambit's analysts in their note.
The order book is under pressure consequent to deceleration in orders. In the quarter, it secured orders of Rs 1,500 crore, a drop in the ocean compared with Rs 20,000-crore orders in the March quarter. Year on year, these were down 80 per cent, consequently, the order book fell 20 per cent to Rs 1,08,600 crore. Though the same at 2.3 times its annual revenues provides visibility in the interim period, if the flow of orders remains weak (lower than projects executed or revenues booked), then this visibility will only fall further. The good part is the company is hopeful of bagging orders. Ambit analysts said, “On ordering, the management highlighted RFQ for 11,000 megawatt (Mw) from companies like NTPC, Neyveli, Andhra SEB and Tamil Nadu SEB. The management also highlighted BHEL’s improving competiveness in bidding given customers are asking for vendor finance and BHEL has partnered REC for this.”
The situation is equally worse for the capital goods industry. And the concerns are likely to continue for 12-15 months and will hurt the company as well, considering the huge challenges the power sector is facing. Unless the country undertakes power-sector reforms in cleaning the books of state electricity boards (SEBs) and making those financially viable as well as resolves the issues pertaining to fuel availability (coal and gas), a meaningful pick up in new projects (and hence, equipment demand) is unlikely.
While most of the concerns pertain to the industry, any revival in the power equipment segment and economy could see BHEL emerging as a big beneficiary. Its leadership in the sector, engineering capabilities, strong balance sheet, large capacities and product quality are, at some point, going to play its favour, say analysts.
"We believe infrastructure creation in the domestic economy should enable BHEL to consolidate and improve its share of 1.5-2.0 per cent in India’s Gross Fixed Capital Formation (GFCF), given the scale of its operations and expertise. However, we expect the same to fructify over FY15-16 and, hence, we have adopted a cautious stance, specially in the light of margin pressure and reduction in float generation," said Amol Rao, who tracks the company at Anand Rathi.
The weak environment, however, has also led to some balance-sheet pressure. Even as revenues have fallen, the capital employed has risen in power and industrial segments. Analysts say with minimal incremental capex, this is likely due to increase in working capital (receivables from customers).
At current levels, the stock is trading at historically-low valuations of eight times its FY14 estimated earnings and one time its books value (or a 50 per cent discount to five-year average forward P/E). Analysts, though, aren’t excited.
“We see no signs of a re-rating in the valuation. We expect an earnings CAGR of -26 per cent over FY13-15 and a return on equity of 10.5 per cent in FY15. Also, we do not see any visible signs of improvement in orders in three years, given under-construction orders of 125 GW compared to the capacity addition target of 200 GW in ten years. This implies a yearly run rate of 7.5 GW compared with the domestic capacity of 30 GW,” said Ambit analysts.
