BHEL: Building on strength

Share price of the state-owned power turbine maker Bharat Heavy Electrical (BHEL) eased nearly 2% today as investors seen taking profit off the table after previous days rally.

On Monday, BHEL share price climbed 13% on inviting expression of interest from global companies to partner with and leverage its facilities for setting up manufacturing bases in the country.

The ongoing economic disruption across the world due to COVID-19 has highlighted the dangers of manufacturing activities being concentrated in a single location.

The need for diversification of supply chains and manufacturing has thrown up a huge opportunity for India which is one of the fastest-growing economies of the world and an attractive investment destination with strong democratic governance, a well-established judicial system, young workforce, one of the largest domestic markets and favourable investment policies.

BHEL said its facilities and capabilities along with its tie-ups put it in a strong position to support any international company in setting up a base in India.

The company has 16 manufacturing facilities across the country with a substantial land bank as well as extensive built-up industrial, commercial and residential spaces. Its manpower strength of about 34,000 includes 9,000 engineers.

Besides, BHEL has 16 centres of excellence (CoEs) in varied areas like computational fluid dynamics, intelligent machines and robotics, machine dynamics, nano technology, power electronics, ultra-high voltage, advanced transmission, control and instrumentation, surface engineering, coal research and advance fabrication technology.

It also has five specialised research centres for welding research, ceramic research, electric traction and pollution control.

During Q3FY20, order inflow came in at Rs 5950 crore, down 22.7% YoY, (Rs 3240 crore from power segment, Rs 2230 crore from industrial segment, Rs 480 crore from exports segment) while 9MFY20 inflows stands at Rs 17000 crore

order backlog as on Q3FY20 was at Rs 107654 crore, of which executable order book is Rs 87495 crore. Bhel is favourably placed in orders worth Rs 13000 crore (Talcher plant- Rs 6300 crore, FGD- Rs 4200 crore, industry segment- Rs 900 crore)

On the industrial side, Bhel is gaining good traction in solar EPC, railway electrification, locomotives, aerospace and defence manufacturing orders.

However execution challenges along with high level of receivables (Rs 38066 crore, down 0.5% vs. March 2019) have impacted working capital and could hamper medium term growth prospects for BHEL.

Out of these debtors as on 9MFY20, state utilities accounted for 48%, central PSUs 32%, private firms 12% and exports 9%.

With insufficient order placement activity in the industry, 3% RoE and 4% RoCE in FY21E and a high debtor position, we believe BHEL is not out of the woods yet

Hence this sharp 13% upsurge in the BHEL stock looks unsustainable purely on this newsflow of inviting expression of interest from global companies to partner with and leverage its facilities for setting up manufacturing bases in the country. The markets will await better clarity and wait for actual numbers here which will only make the stock sustain gains ahead.

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