BHEL's worries are not over yet

Last Updated: Thu, Nov 07, 2013 05:09 hrs

Even as Bharat Heavy Electricals Ltd (BHEL)'s recent share price movement (up 38 per cent since August-end) is reflecting the Street's hope of a recovery, the company continues to give a disappointing performance.

On Wednesday, BHEL reported a 64 per cent year-on-year fall in net profit for the September quarter, led by a 1,359-basis-point drop in operating margins to a mere 4.7 per cent. Lower execution and higher fixed cost, as well as component of low margin orders have hurt margins.

Further, falling order book, losses in the industrial segment and the merged company, Bharat Heavy Plates and Vessels, have concerned the Street as reflected in its share prices, which fell 1.3 per cent on Wednesday to Rs 140.45.

"Against the backdrop of poor results, I do not think there is reason to buy shares at these prices. Also, considering the prevailing situation in the industry, there are no major positive triggers. BHEL can fall to Rs 115-125 levels, and then one can consider buying it," said Rabindra Nath Nayak of SBICAP Securities.

September quarter sales fell 15.2 per cent year-on-year to Rs 8,819 crore due to slow moving orders in the overall order book and slow execution on account of delays from the client and extended payments cycles. While this was largely known and sales came along expectations, the biggest disappointment came from net profits, far below expectations of Rs 798 crore.

The industrial segment has come as a big drag on profitability. During the quarter, this segment reported 13.4 per cent decline in revenues, but made an EBIT loss of Rs 4.22 crore versus a Rs 438 crore profit in year ago quarter. Analysts attribute the loss to higher cost, lower utilisation of capacities and pricing pressure. "Besides industrial segment, Bharat Heavy Plates has contributed about Rs 120 crore losses, expected to continue over the next few quarters," said Rabindra Nath Nayak.

The next few quarters will be crucial. If the industrial segment (20 per cent of revenue) and Bharat Heavy Plates take a longer time to recover, it will drag overall performance. In power as well, order intake was not only subdued at Rs 2,000 crore but also lower than a year ago's Rs 3,153 crore. The order book (pending orders) at Rs 1,02,300 crore or 2.4 times its revenue is depleting.

Analysts are worried over the increasing pressure on balance sheet, given a debt of Rs 8,000 crore remains overdue for one-two years. At September-end, trade receivables have gone up to Rs 29,760 crore and cash fallen to Rs 6,221 crore, against Rs 29,235 crore and Rs 7,732 crore, respectively, in March. Prasada Rao, CMD, said, "Project awarding is improving with the emphasis of CCI on clearing large projects. We are expecting by March projects of 15,000 Mw to be finalised."

Besides, some of the slow moving projects of Bajaj and Monnet have started to move".

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