Crisil on Monday revised downwards the rating outlook on the long-term bank facilities of Bharat Heavy Electricals (BHEL) to ‘negative’ from ‘stable’. The credit rating agency, however, reaffirmed ratings for the long-term and short-term facilities of the power generation equipment maker at AAA and A1+. The outlook revision took into account BHEL’s slow project execution and stretched working capital. Total bank facilities worth Rs 60,000 crore were rated.
“The outlook revision reflects Crisil’s belief that BHEL’s project execution and profitability will remain vulnerable to ongoing structural issues in the power sector and that the company’s working capital cycle will remain stretched,” the agency said, explaining the rationale behind the revision.
Among the structural issues faced by BHEL it said were delays in land acquisition and environmental clearances, ensuring fuel availability and funding challenges.
The agency added the rating may be downgraded if project execution continues to be slow such that there is no meaningful improvement in profitability or if a deterioration in the receivables or sizeable debtor write-offs impact the financial metrics.
The outlook may be revised to ‘stable’ if profitability improves, backed by a structural revival in the country’s power sector translating into better-than-expected project execution and prudent cost control measures.
Crisil noted that although the government has taken initiatives to speed up clearances for standard power projects, including auction of coal blocks, it may take longer than expected to materially strengthen BHEL’s business profile. The agency added that BHEL’s receivables continue to be sizeable with around a fifth of the funds due from private sector developers whose projects face delays or are short of funds.
According to company’s 2014-15 annual report, total receivables including long-term are Rs 42,717 crore. For the quarter ended June 2015, BHEL’s revenue fell 15% year-on-year to Rs 4,362 crore, led by a 19% decline y-o-y in the power segment. Had it not been rescued by other income of Rs 492.4 crore, BHEL could not have reported a net profit during the quarter.
Noting that costs remained higher in the quarter, Crisil added that a structural revival in India’s power sector translating into better project execution will have a key bearing on profitability for BHEL over the medium term.
The agency pointed out that the firm’s strengths including the leadership in the power and industrial electrical equipment markets, a healthy order book and strong financial risk profile are partially offset by high receivables, declining sales and exposure to intense competition and structural issues in execution of power sector orders.