When Bharat Heavy Electricals Ltd announced its annual results for last fiscal this year, B Prasad Rao, the Chairman of the company, surprised investors and analysts by claiming fresh order for the company had jumped approximately 44 per cent to INR 31,530 crore and this came in when launch of new power projects was at an all-time low. Rao in addition also built positive sentiment by pinning his hopes on continued orders from public sector in the near future.
Three months since the claim, bubble of positivity and growth has been burst. Orders dipped around 80 percent to INR 1,500 crore in the 1st quarter. Profit fell 50 percent to INR 465 crore and net sales has declined 24 percent. The repercussion to this, not surprisingly, company's share has tumbled by 24 percent within two days. Government too has shelved a plan to offload its stake in the company owing to low market valuation and shocking order book position.
A heedful look at key figures reveals that the bubble was based on low base of order inflows at INR 21,000 crore in the year 2011. The company had witnessed order inflows of around INR 60,000 crore in each of the three financial years preceding 2011. So, the order inflow figure of 2012-13, announced with much chest-thudding, was still a four year low. As far as the June quarter is concerned, even the public sector orders dried up due to a general slowdown in award of new projects.
A company executive said that the dismal quarter performance should not be a surprise. Chronically, BHEL has grown at the rate of growth of 2-3 percent. High growth in capacity addition and investments in the past years had inflated expectations. Growth can never be as bad as it has been in this quarter and this was mainly as no significant orders came during the quarter to spruce up the numbers.
The executive also said that the initial projection of high growth was based on the expectation that new projects will get finalized quickly. "We had anticipated orders from new projects to flow in. Unfortunately, the whole decision-making process in the sector has slowed. Funding has become expensive and promoters are sitting on investment plans," he said.
Good consideration is, company still expects to procure 47 percent of INR 80,000 crore worth of orders lined up from a pipeline of over 11,000 Mw of capacity to be commissioned in current fiscal. However, for the new orders to shore up its shrinking operating margin percent, it will have to act quickly to settle the outstanding receivables of crores from customers. "These receivables have refused to come down from where they were in April. This is because a bulk of this is deferred debt linked to BHEL achieving project milestones," the executive said.
in addition, the company also woes, increase in import duty on power equipment announced last year to cut competition from Chinese manufacturers has not helped. "The gain has been offset to a large extent by the recent depreciation in the Rupee. As much as 30 percent of our input cost is based on imported material," the executive explained.
Why BHEL has been losing orders to other country companies, especially Chinese, is product-mix. Chinese specialize in supplying higher size units of 660 Mw, while BHEL continues to stick to 270-500 Mw sub critical units. Cost and time to deliver are two other factors. BHEL supplied around 25000 Mw of power capacity, while non-BHEL equipment stood at over 30,000 Mw in the last Plan period.
The new orders of close to INR 40,000 crore are expected to be grabbed this fiscal and the same will help BHEL bridge a part of the order shortage problem. But any turnaround in growth would require improvement in investor sentiment leading to launch of new projects. Company had an outstanding order position of INR 108,600 crore as on 30th June, which is lower than INR 115,160 crore as on 31st March 20 and INR 122,300 crore on 30 June 12.
(1 Crore = 10 million)
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