Are BHEL investors overlooking concerns?

MUMBAI : Bharat Heavy Electricals Ltd (BHEL) stock is up 77% year-to-date in 2023. The government’s capex thrust has recently picked up on capital goods stocks. But in BHEL’s case, order inflow outlook is strong mainly for its thermal power segment, fueling optimism among investors. So much so that, despite dismal September quarter (Q2FY24) earnings, the stock is up 13% in response to the results.

BHEL reported a net loss of 233 crore in Q2FY24 as against a net profit of 10 crore in the same quarter last year. Higher raw material costs weighed on its operating performance. The stretched working capital situation and higher debt were another source of disappointment. As of September end, BHEL’s working capital came in 4,382 crore from 1,210 crore at the end of March. Higher debtor days (clients taking longer to pay) results in a lengthened working capital cycle, a constant concern for BHEL.

“There are very few power projects under construction viz. 3x800MW NTPC Patratu has back-ended payment terms (towards the end of the project) which has been a source of working capital stress for the company,” JM Financial Institutional Securities Ltd said.

The pain of higher debtor days will ease in FY25 onwards when a large number of projects with better payment terms are commissioned, the JM report said.

But for now, the Street appears to be fixated on the state-owned company’s order prospects. Order inflow for Q2 was up 49% year on year 17,900 crore bringing the order book to 1.14 trillion since the end of September.

Facing a continuous rise in power demand in the country, the Ministry of Power / Government of India has revised its thermal order plan to 53GW by FY30-31 from earlier 24GW, said a Nuvama Research report. This means 10-11GW of order every year and at least 5GW of order inflow for BHEL (50% market share) compared to the current assumption of 3GW, he added.

Additionally, the company’s ongoing efforts to diversify into non-thermal power segments for railways, hydro-pumped storage plants, and defence, are expected to keep BHEL’s order book in good stead.

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Updated: 19 November 2023, 09:07 PM IST

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