Bhel: Stranded power projects to hit FY16 sales

The quarterly performance of capital goods maker Bharat Heavy Electricals reiterates the common refrain that there's little change on the ground. During the quarter, Bhel's revenues declined 16% to Rs 12,690 crore.

Adjusted profit after tax fell 52% year-on-year to Rs 890 crore. While investors believe that the outlook should continue to improve in the coming year, there is no clarity on when there will be a visible pick up in order execution.

Stranded power projects continued to mar Bhel's performance in the March quarter. Stranded projects at Rs 25,000 crore account for 25% of Bhel's order book.

In FY15, the company won projects of 5.6 GW and the management expects fresh ordering to increase to 20 GW in FY16 for the industry. Additionally, newer areas like railways, defence and renewable energy could provide opportunities to the company.

However, the market is not entirely convinced by Bhel's optimisitic assumptions. Analysts believe that fresh ordering would be done largely by the public sector as the private sector is heavily leveraged and unlikely to look at fresh investments.

With all India coal power plants functioning at plant load factor of 65%, HDFC Securities believes, ordering for power plants should be preceded by absorption of untied capacity (nearly 30 GW).

The brokerage does not more than 15 GW of fresh orders annually for FY16/17 and believe management's expectations are very optimistic. Bhel's order book remained flat compared to last year at Rs 101,018 crore, 25% of which are stranded projects.

Analysts believe that the stock is trading at a valuation of 20 times its FY17 earnings. At the current market price, analysts believe, the market is assuming a 20% growth in revenues and high operating margins of 16% levels, which would be difficult to achieve.

Higher competitive intensity and higher fixed costs would cap Bhel's earnings trajectory. During the March quarter, the company's operating margin fell 490 basis points YoY to 13.3% as high overhead costs remained unabsorbed.

Operating margins in the power and industry segment declined by 620 basis points and 950 basis points YoY to 12.8% and 9.7%, respectively. Most brokerages expect the stock to remain rangebound, as revenue growth will take some more time to pick up.

Emkay Global expects BHEL to report muted growth in revenue and profitability over the next four quarters amidst execution slowdown and project delays.