Why BHEL’s Turnaround Is Unlikely Anytime Soon
BHEL was in 2011 awarded a contract to set up a raw material handling system at NMDC’s under-construction Nagarnar steel plant in Chhattisgarh. (Photographer: Nelson Ching/Bloomberg)

Why BHEL’s Turnaround Is Unlikely Anytime Soon

Bharat Heavy Electricals Ltd., the power equipment maker that once was a coveted Maharatna and featured among the Nifty 50 firms, is unlikely see a turnaround in fortunes anytime soon.

Stress in the power sector, higher fixed costs, delays in big-ticket tenders and a failure to ramp up execution will weigh on BHEL, according to analysts.

The state-owned company struggled as its order flow tumbled in the last decade. That’s because India’s power producers sat on excess capacity, with demand for power not growing as expected. BHEL has wiped off nearly 90 percent of investor wealth since its last peak in 2010 and the stock has plunged to a 16-year low. Its share price has tumbled nearly 17 percent since the start of January.

Why BHEL’s Turnaround Is Unlikely Anytime Soon

BHEL’s revenue fell 23 percent year-on-year and profit dipped 17 percent in the quarter ended December, dragged by the weakness both in power and industry segments, according to its filings. Order inflow declined 23 percent and gross margin stood at 36.6 percent—the lowest in 13 quarters.

The capital goods maker clocked a revenue of Rs 16,437 crore in the first nine months compared with its guidance of Rs 30,000 crore for the full fiscal. Gross and operating margins contracted.

In a conference call after the third-quarter earnings, the company’s management said its numbers were impacted by the executable order backlog which fell from Rs 98,600 crore in FY19 to Rs 87,000 crore in FY20.

The top line contracted as it focused on cash and booked revenues where receivables are certain, it said. While receivables continued to remain elevated, working capital was stretched.

The company said 48 percent of its receivables are due from state electricity boards, 32 percent from central public sector units, 12 percent from the private sector and 6 percent from overseas clients.

Analysts’ Take

Macquarie Group

  • Weakness in the power sector is exacerbated by higher fixed costs, affecting pricing and wiping out profitability of the company, Ajinkya Bhat, analyst at Macquarie, wrote in a note.
  • Radical changes are needed to cut fixed costs and diversify revenue streams, without which revival is unlikely for the state-owned engineering behemoth, he said. Such changes, he said, are slower to implement in a public sector enterprise.
  • BHEL’s FY21-22 outlook looks “blurred” after continued delays in large tender awards led to a very weak FY20, Bhat said.


  • Sumit Kishore, analyst at JP Morgan, questioned the long-term sustainability of a business highly dependent on coal-based power generation—which is at risk of losing ground to clean energy portfolios in the future and is rapidly being phased out in developed markets.
  • Investors shouldn’t buy the anticipated dip in the stock after third-quarter results till they see some evidence to suggest that execution is back on track, working capital pressure is receding and inflow prospects start materialising, he said.


  • Lavina Quadros, analyst at Jefferies, doesn’t expect the company to bounce back soon. Generation capex will remain muted due to overcapacity and no change in the market outlook or debtors’ recovery, she said.
  • Quadros also remains sceptical of any improvement in working capital cycle due to financially weak state electricity boards as payment to equipment companies is down the chain in priority.

Nirmal Bang

  • Nirmal Bang Institutional Equities is bearish on the stock as it doesn’t expect thermal power capacity addition beyond 10 gigawatt per annum in India due to a rising preference for renewable energy and transmission loss reduction.

Prabhudas Lilladher

  • Viral Shah, analyst at Prabhudas Lilladhar, said he remains structurally negative on the stock given the company’s ballooning debt levels, uncertain receivables and weak fundamentals.
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