BHEL rating ‘underperform’: Revival efforts praiseworthy

We met BHEL management and came back impressed with the initiatives taken to contain costs. FY18 import content has dropped to a seven-year low of 9% of sales. Employee reduction continues and addition is restricted to critical requirements. The first two phases of its ‘Survive-Revive-Thrive’ strategy is complete, with focus now on ‘Thrive’. Non-power is also a growth area. We are watching for triggers of debtor monetisation and reduction of fixed costs for upside.

Focus on indigenisation
Bharat Heavy Electricals’ import content dropped from 17% in FY12 to just 9% in FY18. Larsen & Toubro-Mitsubishi had a 25% import content in FY16 and it is high in FY17-18. As a part of the ‘Survive-Revive’ phase of its strategy, the BHEL management focused on dropping import content to improve gross margin and this has yielded results.
Employee strength reduced by 24% since FY12
BHEL employs 8,000 engineers dedicated to help the company innovate and indigenise. The product quality reflects this with NTPC plants which are over 20 years old still running at PLF levels above 75%. Management is aware of its higher fixed expenses including employee costs, and it is hence focused on reducing material costs to be profitable. Existing manpower has been used more productively by moves to industry segment (non-power) which has growth prospects in power transmission, railways and defence.

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Triggers needed
Management efforts have been commendable given the difficult environment and high fixed costs. While the stock has corrected in the market volatility, we believe triggers of progress on debtor monetisation and fixed overhead reduction are needed for upside.

Company description: Bharat Heavy Electricals Limited is an integrated power plant equipment manufacturer owned by the Government of India. The company has a 62% share in India’s total installed generating capacity. Further the company is engaged in the design, engineering, manufacturing and construction of products for the Power, Transmission, Industry, Transportation, Oil & Gas
and Defence sectors.