Risks to profitability loom over Bhel

The odds continue to stack up against Bharat Heavy Electricals Ltd (Bhel), the country’s largest power equipment maker. Weak order inflows, delayed execution, profitability pressure and operating loss haunted the first two quarters of fiscal 2016. But things are unlikely to get better soon. Here’s why:

Order inflows for the first six months at Rs.22,000 crore may have been about 50% higher on the abysmally low base of the year-ago period. Note that of this, September quarter inflows were a scant Rs.2,000 crore. Save for a few large government orders, the firm is unlikely to see the pace gathering momentum. According to a report by Emkay Global Financial Services Ltd, “The firm accounts for two-third the industry capacity of 30 GW (gigawatt), while the orders are unlikely to cross 10-15 GW over the next two-three years.”

Adding to the woes is delayed execution. This is mirrored in the September quarter’s 3.4% dip in revenue from a year ago. Worse still were the two consecutive quarters of operating loss, ironically when there’s talk about sighting green shoots of recovery in the capital goods segment. Bhel’s saga on operating loss is slightly unusual though. Existing orders in the super-critical segment, which were taken at aggressively low pricing with global joint venture partners, have necessarily had a high import content (up to 65%), which is leading to margin pressure.

BHEL