Brokerage house Bank of America Merrill Lynch sees major setback for State-run Bharat Heavy Electricals Ltd's (BHEL) near-term revenue growth due to cancellation of the Ennore power project and Central Electricity Authority (CEA) denying technical clearance to BHEL's 4x270MW Manuguru sub-critical power project in Telangana. Including the two projects, 32 percent of BHEL's order book is represented by stranded/slow moving projects, the report says.The brokerage has reiterated its underperform rating on the stock.
According to the report, CEA has denied technical clearance for BHEL's 4x270MW Manuguru sub-critical power project in Telangana since sub-critical projects consume 20-25 percent more coal than super-critical projects and emit more pollutants. Projects rejected by CEA are not given environmental clearance (EC) from the Ministry of Environment and Forest. This in turn will result in delay in executing the project, which accounts for Ts 5000 crore, or 4 percent of BHEL's order book.
As far as the Ennore project is concerned. BHEL was awarded the 2x660MW project, worth Rs 7800 crore, or 7 percent of its order book, in September 2014 by the Tamil Nadu Generation & Distribution Company (TANGENDCO). But the Madras High Court recently cancelled the EPC award for the project after BHEL's competitor filed a petition claiming to be the lowest bidder for the project. The High Court has in fact instructed TANGENDCO to re evaluate the bids. "The order was being currently executed and hence will be a major set-back for BHEL's near-term revenue growth," the report adds.
Going ahead, BofAML expects execution delays to continue, as its customers could be impacted by weak financials and low utilization, which, in turn, can result in delayed disbursement of loans from their lenders despite the excitement relating to its strong order flow growth.
However, there are still a few things going the company's way. BHEL on Sunday won five national level awards, while, on Friday it commissioned the 250 MW unit at Sikka thermal power plant.
Excerpts from the report:
"We cut our FY16-18 EPS estimates by 3-5 percent to account for recent order cancellations and, consequently, lower our discounted cash flow-based target price to Rs 155 (158 earlier). Despite a 21 percent order flow compounded annual growth rate (CAGR) in FY15-18(estimated), we expect it to deliver just 8 percent/14 percent revenue/EPS CAGRs. Our FY16-18 EPS estimates are 10-25 percent below consensus."
Earlier this month rating agency Crisil too downgraded its outlook on BHEL's long-term bank facilities, , to 'negative' from 'stable', claiming that the company's project execution and profitability will remain under pressure due to structural issues giving grief to the power sector.
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