BHEL lets investors down again

Market


Investors in state-run Bharat Heavy Electricals Ltd (BHEL) had to digest yet another poor quarterly earnings report. The company’s loss at the earnings before interest, tax, depreciation, and amortization level rose sequentially as well as year-on-year (y-o-y) in the September quarter (Q2FY23) to nearly 244 crore. It is the ninth such quarter among the last 11, pointed out analysts at Investec Capital Services (India).

Total operating revenue rose by just 1.8% y-o-y to 5,202 crore. Steep gross margin compression because of commodity cost inflation, elevated working capital and high receivables were also disappointing. The street disapproved and BHEL’s shares fell by 5.6% in the past two trading sessions.

Shot in the arm

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Shot in the arm

Amid the gloom, the much-awaited Talcher thermal power plant order awarded by NTPC Ltd offered some comfort as it gave BHEL’s order inflow a boost in Q2. In the post earnings call, the management said that orders from coal-based power plants are showing strong revival after four years. According to Investec, with power peak deficit rates increasing during summer and no viable storage solution for renewable available, thermal power plant ordering is likely to commence again.

Further, the management was also upbeat on the railway segment and said BHEL will bid for three trainset tenders including locomotive tenders. The company aims to capitalize on opportunities in sectors such as steel and refineries. The management reiterated that under its FY22–27 strategic plan, it would focus on various initiatives including cost effectiveness and increasing market share in conventional segments.

However, the outlook for the BHEL stock is dull as a significant turnaround in the company’s key metrics is not going to happen overnight and depends on many factors. There are concerns on execution and pace of recovery in gross margin. “The company needs to grow topline to 20% or higher levels at a minimum (assuming gross margin improvement to report profit after tax break-even),” said analysts from Kotak Institutional Equities in a report on 14 November.

The analysts also said that the 2X660 MW Talcher order win should start reflecting in revenues in a meaningful manner in 18-24 months, but since BHEL has bid for it aggressively, gross margin recovery would take longer.

BHEL has been diversifying into non-thermal segments such as railways, transportation, and defence, but the progress there has been painfully slow and these are still at nascent stages. Orders in some segments such as nuclear tend to have a long-gestation period, while in others increased order intake may not necessarily be gross margin accretive, said analysts.

Meanwhile, hopes of revival in thermal power capex have boosted sentiments for the BHEL stock in FY23 with the shares rallying 42.5% so far. However, investors should not get carried away by this. Competitive intensity is high. Besides, returns for the stock over the past one year have been measured at 10%.

“A large order has aided the company’s order book in H1FY23, but challenges on the execution front remain, which is languishing below expectations,” said Amit Anwani, research analyst at Prabhudas Lilladher. BHEL’s order inflow in Q2 was around 12,000 crore, of which Talcher contributed 8,740 crore including taxes.

There has been a structural change in the power sector with increased emphasis on renewable energy and BHEL has not been able to come up with a strategy to navigate this change and thus improve its financial performance, Anwani said. “This has to fall in place for the stock to see a meaningful re-rating,” he said.

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