As per a press release by BHEL’s corporate communication, India Ratings & Research has downgraded BHEL’s long-term rating for Bank Loan Facilities from ‘IND AAA’/ Stable to IND AA+/ Negative.
We believe that the rating downgrade is in response to likely operating losses and persisting execution challenges in the near-to-medium term, deteriorating quality of BHEL’s receivables and likely acceleration of recognition of bad debt expense under Ind-AS. As per a media release, progress at `56 billion 1,600MW Uppur Thermal Power Plant (TPP) has come to a standstill led by land acquisition issues. Over the past few months, BHEL has rallied along with the market as it appears to be one the cheapest Industrial stocks.
However, we believe that the rally is not supported by improvement in fundamentals.
We maintain our underperform rating on the stock led by the potential for further deterioration of fundamentals and see three key negative triggers in the near term: Delay in two large NTPC projects could impact BHEL’s FY17 order flows by 26%, continued operating losses with persisting execution challenges in the upcoming Q1FY17 results, and acceleration of bad debt expense under Ind-AS. Our PO of R95 for BHEL is based on FCFE, using a cost of equity of 14.5% and a terminal growth rate of 4%.
Merill Llynch