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Money Jan 30, 2012

Shrinking orders, higher costs: Bhel could crash to Rs 200

By Firstbiz Editors

Judging by state-run Bharat Heavy Electricals Ltd's third quarter numbers, the power sector is in dire straits. For the first time in the last 10 years BHEL has seen a decline in its order book. While analysts factored in a slowdown in order inflow, very few had actually taken into account order cancellation.

While inflows slowed down, the company was hit by cancellation of orders worth Rs 5,800 crore, thus leading to a negative order inflow.

Apart from the order book, what spooked the market was a sharp decline in the company's operating margins. Reuters

Apart from the order book, what spooked the market was a sharp decline in the company's operating margins. Higher material cost and other sticky costs have resulted in operating margins falling by 3.5 percent. This high cost is likely to continue over the next couple of quarters, thus having a continued impact on its margins.

Though sales of the company grew 19 percent to Rs 1,0,548 crore, its net profit was flat at Rs 1,432 crore compared to Rs 1,403 crore in the third quarter of 2010. Material cost increased 25 percent during the same period, while other costs shot up by 65 percent.

A private sector power generating company has cancelled its order with BHEL, raising chances of others too canceling their orders. Analysts have all cautioned against this possibility post the company's results. With no clarity on supply of fuels and the poor state of financials by the state electricity boards, there are very few companies which are keen on setting up power plants.

In its report on the company's performance, Goldman Sachs said that BHEL would report a declining revenue trend over the next two years. HSBC does not expect an increase in fresh order flows as tendering for the 12th plan is almost done (97 Megawatts done) while the 13th plan is unlikely to start over the next two years.

With a negative visibility over the next two years, there is little reason for the stock to move higher. BHEL trades 8 percent lower at Rs 252, a day after declaring its results with analysts warning of the possibility of price touching Rs 200 levels.

by Firstbiz Editors

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