BHEL My Favourite Stock Pick

Bharat Heavy Electricals (Bhel), the country’s largest power equipment manufacturer, has definitely got cause for concern. Rising operating costs and now competition from imported equipments, especially China is bound to the management and shareholders, some sleepless nights.

The financial performance of the PSU for first quarter ended 30^th June 2008 , on a YoY has been good but disastrous on a QoQ basis. YoY, the topline and the bottomlines have shown an average rise of 30% but when compared with margins, it has been more of less just about the same. But QoQ, topline declined 40% while PBT and PAT fell 65%. OPM slipped from 24.82% to 15.37% and NPM from 15.42% to 8.88%. This is especially worrisome as during the quarter, the company was able to utilize the upgraded 10,000 mw of capacity.

Mounting operating costs have gnawed at the margins. In current Q1, operating costs ate away 91% of the net sales, which was at 74% in Q4FY08. Raw material costs accounted for 58% of the total expenses. Its cost on employees was over Rs.800 crore.

On the other hand, what is assuring is that the company has an outstanding order book position of about Rs.95,000 crore at the end of current Q1. BHEL is a mammoth company. Last fiscal, it faced constraints of growth as its capacity could not keep pace with the orders. Now the backlog has been cleared to some extent, yet its delivery schedule continues to remain 9-10 months behind schedule. Its problem is of plenty and not that of scarcity.

And hence it is not too perturbed by the fact that it is losing out orders for the UMPPs to China, which seems to have better economies of scale, offers higher flexibility while bidding for such projects. This competition has forced BHEL to operate on low profit margins to take on the foreign bidders. In UMPPs import content is very high and BHEL imports from Europe. Until it manages to indigenize these imports, its bidding prowess in UMPPs would be lower. So far, the two orders for supplying super-critical equipment to UMPPs have gone to foreign companies — Doosan of Korea and Shanghai Electric Power Company of China. There are 10 more UMPPs to come, maybe till then, BHEL would have managed indigenization and also rectified its delivery schedule.

Currently quoted closer to its low of Rs.1325, it is dips below Rs.1,500 levels, one can consider buying for long term.
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