BHEL under financial stress due to high thermal power outlook.

Rising preference for renewable energy has put power plant equipment supplier Bharat Heavy Electricals Ltd (BHEL) in a tough spot . High exposure to the thermal power segment has become a root cause of BHEL’s disappointing earnings consistently.

In the September quarter, BHEL posted a stand-alone net loss of ₹556 crore against a profit of ₹118 crore for the same period last year.  Revenues were lower than expected, declining by around 40% year-on-year (y-o-y) to ₹3,695 crore in Q2FY21.

On a y-o-y basis, order inflows halved to ₹3,720 crore and order book was flat at ₹1.1 trillion. Total receivables saw a marginal decline annually and sequentially, but remain elevated at ₹34,900 crore in Q2FY21. According to the management, state-owned companies accounted for 48% of the total receivables. It was followed by Centre (33%), private players (12%), and exports (7%), the management added.

BHEL continued to report losses at the operating level in the September quarter. In a report on 10 November, analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd said lower employee cost helped reduce operating losses. However, BHEL’s Ebitda loss at ₹633 crore was significantly higher than their expectation of ₹499 crore and consensus estimate of ₹212 crore, added the report.

wage inflation has eaten into the gains from lower number of employees. “BHEL has an employee base of around 34,000, and employee cost formed 18%/25% of sales in fiscal year 2019/ fiscal year 2020. While we appreciate that the company has been able to bring down the employee base from 46k in FY10, wage inflation has negated the benefit of the same,” said analysts from Motilal Oswal Financial Services Ltd in a report on 9 November. Moreover, declining revenues imply lower absorption of fixed costs, hurting profit margins. “Thus, BHEL posted Ebitda-level loss in FY20, from 16–20% Ebitda margins in the good years (FY04–13),” pointed out the domestic brokerage.

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