BHEL left fumbling in a crisis-hit power market

Published: March 23, 2016 - 15:05 Updated: March 23, 2016 - 16:18

Hardnews Bureau Delhi

Power sector problems have taken their toll on BHEL (Bharat Heavy Electricals Limited), with the state-owned equipment supplier losing more than half of its stock market valuation in the last year. And what is worse, there is no end in sight to the free fall.

BHEL is not an exception to the industry trend given that shares of other equipment suppliers too have taken a hit as a consequence of the deep slowdown prevailing in the power sector. But what is noticeable is that BHEL has suffered the most. This is because the PSU has all its eggs in one basket - the power sector. Over the years, the company management has failed to diversify BHEL’s business portfolio, away from the power sector.

The UPA government in 2013 gave a 2-year extension to then-chairman BP Rao, overriding the Public Enterprises Selection Board which had selected Prakash Chand, Executive Director at the company’s Haridwar unit at the time. The argument used by the government to justify its decision was that Chand lacked director-level exposure and thus was not the best choice to lead the PSU at a time when it was facing strong headwinds. But Rao failed to deliver on expectations. 

The government has taken a series of steps to reverse the sagging fortunes of the power sector. However, these have had little impact on BHEL’s fortunes. International investment research firms remain pessimistic about the prospect of improvement in its performance.

After BHEL’s dismal December results, UBS cut the company’s target price from Rs 115 to Rs 70.  Nomura in its analysis noted that the company has posted successive quarters of weak gross margin and its mounting receivables have touched nearly one year of sales.

BHEL has forged technology partnerships with Alstom and Siemens for building supercritical equipment. However, utilities are seeking a Joint Deed of Undertaking from BHEL to provide its partners' warranties on equipment supplied by the PSU. That means BHEL has to source a certain proportion of equipment from its technology partners, which would lead to increased cost for the company, pointed out Nomura.

The company’s receivables stood at Rs 35,900 crore, more than its annual revenue of Rs 30,667.63 crore at the end of March 2015. Another problem area that analysts have pointed out is that order flows to BHEL will start slowing again from FY17, the reason being that NTPC and state utilities are done with the award of contracts while the private sector continues to hold back on fresh investment due to leveraged balance sheets.