BHEL affirmed at Fitch AAA(ind) rating; outlook stable

Fitch Ratings has affirmed India-based Bharat Heavy Electricals Limited's (BHEL) National Long-Term rating at 'Fitch AAA(ind)'. The Outlook is Stable.

The ratings reflect BHEL's leadership position in the Indian power equipment segment and its strong liquidity position with cash balances of INR79.5bn as of H1FY12 (end-September 2011). Fitch expects BHEL to continue to generate large positive free cash flow in the medium-term due to its strong order book position of about INR1,600bn as of end-September 2011 (end-September 2010: INR1,540bn). Consequently, Fitch expects the company to remain a net debt negative company over this time frame. Further, BHEL's capex for capacity expansion to 20GW by FY12 from the current 15GW is being completely funded through internal accruals.

Orders from the power sector contribute about 80% to the order book, with 14% from the industrial sector and the remainder form international orders. BHEL's order flows have remained low over the last three years at around INR600bn, largely due to the various issues facing the power sector projects in India resulting in slower order inflows. However, Fitch expects that the slowdown will be corrected in the near to medium term driven by the government's increasing focus towards improving power situation in India. Meanwhile, the existing order book will continue to support BHEL's revenues.

BHEL's EBITDA margins improved to 20.7% in FY11 from 18.0% in FY10 primarily due to lower raw material prices, which as a proportion of sales reduced to 51.4% in H2FY11 from 59.2% in H1FY11. However, the raw material costs as a proportion of sales increased back to 58.9% in H1FY12.
BHEL is facing competition from India-based and foreign players, which could put pressure on its margins in the medium term. The agency notes any tariff protection measures by the Government of India against imported equipment may be beneficial to BHEL.

Any significantly large debt-led investment or acquisition may result in a review of the ratings.

BHEL's revenues grew by 17.7% yoy in H1FY12 to INR174.2bn, with an EBITDA of INR30.7bn (INR26bn). Revenues from the power segment grew at 9.8% over the period, while industrial growth was strong at 38.4% during this period.

List of instruments rated:
INR12.5bn fund-based working capital limits (enhanced from INR6bn): affirmed at 'Fitch AAA(ind)'
INR537.6bn non-fund based working capital limits (enhanced from INR494bn): affirmed at 'Fitch AAA(ind)'/'Fitch A1+(ind)'

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More