The BHEL stock has tumbled nearly 50 percent in the last one year and the company’s fourth quarter earnings declared last week do not hint at any near-term comfort. With slow pace of execution on nearly 45 percent (Rs 50,000 crore) of its total order book (Rs 1.1 lakh crore) and challenges on margins thereof, FY17 could well be another loss-making year.
A note by Macquarie Research forecasts another year of operating losses for BHEL on higher fixed costs and a muted gross margin.
Gross margin, the note says, could stay low due to increased mix of engineering, procurement and construction (EPC) jobs (higher outsourcing), stiff pricing and super-critical projects taken on a joint deed undertaking (JDU) basis.
Another note by JP Morgan expects loss provisions to continue to dent profitability in FY17. "Even now around Rs 21.4 billion is outstanding receivable from stressed projects; we assume loss provisions of another Rs 12 billion in FY17," says the note.
Fresh order inflow during FY17 is also likely to be limited with the company going conservative in guiding that only 7 gigawatt (GW) worth Rs 200 billion of the 12 GW order of Rs 280 billion, in which it is the L1 bidder, will get placed during the year.
The only ray of hope for the company now appears to be early award of Ultra Mega Power Project (UMPP) by the government. But, as JP Morgan puts it, even then the UMPP developers would have to complete the process of awarding contracts in FY17 and BHEL should win, which they believe is a tall order.
There are, however, some takers of a turnaround story in the company. CLSA, for example, is positive on the company citing power reforms and expected respite from the headwinds of slow-moving, low-margin legacy orders. Besides, benefit from recent government advisory to central and state owned power utilities to use locally-made equipment will help.
“We believe the key to turnaround for BHEL's execution and earnings are three large orders worth Rs 30,000 crore (27 percent of its order book), which are ‘on hold’ due to environmental clearance and court issues,” the CLSA report says. "Our channel checks suggest all of these are reaching a tipping point and are likely to be resolved in 2Q FY17 (September quarter)," the report says.
But as BSE and NSE member Dipan Mehta puts it, BHEL seems to be 'well past its prime' as focus has clearly shifted from power generation companies--BHEL's key clientele--to transmission companies.
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