Double whammy for BHEL: Project delays, fall in order inflow a worry
BHEL's FY14 rev growth dipped after several clients delayed execution. Also, order inflows have tripped due to paucity of domestic orders for new power plants.
According to provisional results released to stock exchanges, order inflow growth slid by 12 per cent on a year-on-year basis to Rs 21,800 crore at the end of FY14. Order inflows have been declining since FY12 leading to gradual depletion in total orders in hand.
Such a depletion in total orders lends limited visibility of revenues beyond three years. In FY14, revenue growth declined by 20 per cent, given that several upcoming power plants are in a limbo. Power plants are facing challenges such as funding constrains, fuel supply-related concerns or power purchase agreements (PPA) which are yet to be finalised. The slow-moving projects in FY14 include IndiaBulls Nasik Phase two, Monnet Power and Visa Power plant’s order.
In a report dated April 6, CLSA said that 20 per cent of the orders in hand for BHEL are ‘slow moving’. According to Bloomberg data, BHEL’s average revenue growth was 16.4 per cent during the last five years, but FY14 revenues declined on a YoY basis, for the first time since FY03.
For FY14, profit margin dropped to 8.4 per cent from 13.9 per cent in FY13, a decline of 520 bps. The decline in margin has been attributed to higher fixed cost and utilisation levels trailing down to 55-60 per cent. New wages due to be implemented from FY17, along with lower priced order due for delivery, now puts the equipment maker’s operating margin at the risk of running under pressure.
During the past three years, annual average order inflow has compressed to Rs 28,000 crore compared with Rs 60,000 crore during the preceding three financial years. The order inflow constrained by overcapacity in power equipment companies and aggressive bidding which ensued grabbing of bulk orders floated by public sector power companies.
With rising competition, the per megawatt prices of boiler turbine generator as well as engineering procurement construction (EPC) have declined by 15-25 per cent in the past three years. Aggressive bidding for bulk orders floated by public sector power firms is likely to take a toll on BHEL’s gross margins.
The impact on gross margin will be more apparent only in the next two-three years as these orders approach delivery deadline. In the quarter to March 2014, BHEL secured aRs 7,900-crore EPC order for North Karanpura power plant and a Rs 3,000-crore boiler order for the Darlipalli power plant, both orders floated by NTPC.
On the valuation front, the BHEL stock is trading at 16 times on a one-year forward basis, which is higher than the average of last five years. Given that the company faces multiple headwinds such as order inflow issues, weak margin, and wage pressure, its valuations appear stretched. No wonder almost 70 per cent of analysts tracking BHEL have assigned a "Sell" rating on the stock.