IT was around two years back, in May 2013, after Bharat Heavy Electricals (BHEL) announced numbers for Q4FY13 that Citibank wrote a report headlined: More Questions than Answers.
The brokerage worried the numbers weren’t quite adding up.
“Weren’t sales robust? Yes, and the profit and loss statement does suggest that 4QFY13 and FY13 sales were well ahead of expectations, which management explains is because of robust execution. But why were receivables at 290 days, which looks like an aberration? We wonder if there is an element of advancement of future sales to meet FY13 MoU targets, given the nature of revenue recognition,” it said.
In August that year Citibank wrote another report: Not Too Late to Bail Out. It worried that there had been no improvement in the receivables which had increased quarter-on-quarter to R41,000 crore! “All the cost items in BHEL’s Q1FY14 results are in line with expectations. Only one thing amiss is sales, which are down 24% y-o-y, which lead to PAT at R470 crore, down 49% y-o-y,” it said.
Indeed, R470 crore appears to be a princely sum. Since then BHEL’s performance has continued to deteriorate, with sales slipping in FY14 to R39,569 crore, a fall of 19% to a level where in the three months to June 2015, it reported an operating loss of R209 crore and a net profit of just R37.3 crore. Q1FY16 revenue fell 15% yoy to R4,362 crore led by 19% decline y-o-y in the power segment. Had it not been rescued by other income
of R492.4 crore, BHEL could not have reported a net profit during the quarter.
Chairman and managing director B Prasada Rao confirms his company is not seeing traction in execution of many projects as it struggles to get full clearances and acquire land. Rao projects a demand for 15-20 GW for the next two years but is hesitant to give guidance for the size of the market in the coming years. Like everyone else, he too is calling for much-needed power sector reforms, especially on the distribution side that can help balance demand-supply mismatch. “Unfortunately in this country power is a concurrent subject. Both central and state governments have to deal with it. And being run by different governments at the state and central level, all of them are not talking the same language,” Rao laments.
Pushed to the wall and desperate to win market share, BHEL has been bidding aggressively. Which means margins will likely remain under pressure. But the company defends its strategy. “The prices have been slightly aggressive definitely, but then it depends on the volumes. We have 20,000 MW capacity and if I am able to use a large portion of that capacity, my per unit prices can be more aggressive than anybody else because other competitors’ capacities have been very low,” Rao contends. Barclays believes order inflow visibility for the current year remains strong led by a combination of negotiated order wins and some bidding-based wins.
BHEL is looking at a healthy L1 (level 1 of planning) orders of about 5 GW which it hopes to win in the next six months. Given most projects are led by public sector companies and state electricity boards, BHEL appears way too dependent on government spending. The slowdown in the execution of the power engineering equipment business apart, the industrial segment too has seen a compounded fall in net sales of nearly 15% in the last three years. There is some traction in the solar photo voltaics (PV), defence and transportation segments that are part of the industrial business segment. While the management hopes to benefit from some UMPPs (ultra mega power plants), the first of which the BHEL management thinks may happen within FY16, any reflection in the firm’s revenues is some time away.
Orders are gaining momentum; excluding the negotiated order worth Rs 17,900 crore from Telangana for 4 GW Nalgonda plant, the order inflow in Q1FY16 improved by 58% to R1780 crore. The management says it will win some 15-20 GWs for FY16 and FY17 but at the end of the day, it’s more about execution than winning. With SEBs financially strained and near-bankrupt, they’re unable to procure electricity. Moreover, land acquisition remains a challenge for gencos. BHEL currently has 10 GW of slow-moving projects valued at about R24,000 crore or a fifth of BHEL’s current order book of R1.16 lakh crore. More worrying, it has R3,340 crore of receivables outstanding against the execution that has already taken place.
In fact, work on the Telangana order is not expected to begin before Q3FY16 while the deal for 15 high-speed trains that BHEL is bidding for in collaboration with Kawasaki and Toshiba, is likely to be finalised only after January. Some orders for submarines and naval guns could materialise by the end of the year. Analysts expect some pick-up in execution in the second half of the current year; that could lead to better free cash flow generation since advances from customers might come in. But that hasn’t stopped them from trimming estimates: Kotak Institutional Equities has pruned FY16-FY17 EPS estimates by 12% and 6% respectively to R8.3 and R14.4. Some might say, it’s a charitable outlook.