BHEL: Divestment not enough to sustain uptrend

Firm’s order book continues to shrink, stress in working capital on the rise

The Bharat Heavy Electricals’ (BHEL) stock was among the top gainers on Wednesday, with returns of almost 10 per cent driven by foreign brokerage CLSA upgrading its ‘sell’ recommendation to ‘ buy’, with a target price of ~67.

While there is still some upside despite Wednesday’s price movement, it may be worthwhile to ask if its financials support the stock price movement.

For example, the June quarter (Q1) was another washout, with revenues falling 24 per cent net loss at ~216 crore. Operating margins have shown little sign of improvement and haven’t crossed t he 5 per centmark even in the good quarters, which is a third of what it used to be during BHEL’S best years.

The company’s order book, which has been shrinking for most quarters, continued to do so in Q1, down 8 per cent year-on-year to ~1.08 trillion. Stress in the net working capital position increased as well. All these factors indicate that the overall operating environment is far from favourable.

India’s growing dependence on imported coal, weak demand, its inability to predict the same, and most importantly, excess capacities of coal-fed power plants, have all restricted BHEL’S prospects for the past 2-3 years, and continue to do so.

Therefore, while the government’s move to divest its stake in BHEL is a positive, it needs to be seen in the context of operating conditions not being supportive enough for the company.

As for the proposed divestment, analysts at CLSA say it could lead to value unlocking. However, others hold a different view.

“We don’t see a good reason for a private player to pay a control premium for BHEL,” analysts at Jpmorgan point out. Those at Nomura say that unlike Container Corporation of India (Concor), BHEL may not be a good asset for disinvestment.

Further, another research analyst from a foreign brokerage points out that even now, BHEL’S quality of boilers and turbines is world-class and there is very little to do for a new investor. “BHEL is a mouth-watering asset, but the divestment move comes at the wrong time, given the worldwide slump for coal-fed plants,” he adds.

Although BHEL is virtually debt-free with a bit of cash and bank balance, the returns from its core business have been falling. Return on capital employed was a mere 5.7 per cent in FY19.

Therefore, even though the BHEL stock may react positively to news related to the divestment, investors may be caught on the wrong foot if they take fresh exposure purely based on this development.