by In this article, we will do a fundamental analysis of BHEL Ltd, as usual, we will cover the company and the management of BHEL, its competitors, its key risk, future growth prospects, and financials based on the analysis we will decide if the BHEL Ltd are fundamentally strong or not then we will do the valuation analysis of BHEL Ltd to decide if it is worth investing in the company at current levels or not.
Disclaimer: This article is only for educational purposes. I do not recommend buy or sell so please consult your advisor and do your own research before investing.
Contents
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Introduction
- Bharat Heavy Electricals Limited BHEL is the government’s flagship engineering and manufacturing company and has a history of five decades of operations.
- The company is an integrated power plant equipment manufacturer with the capability to deliver 20,000 MW of power plant equipment per annum.
- It caters to all the types of power plants including coal, hydro nuclear gas, and solar.
- The major clientele for the company is power transmission, transportation railway, renewable energy, oil and gas, and defense.
- As the ratings are based on long-term past performance they are relevant for at least three years in the future until FY2022.
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Fundamental Analysis of BHEL Ltd
Fundamental Analysis of BHEL Ltd is differentiated into different categories are as follows, all units are in millions except ratios and per share data.
Economic Model
- The company is promoted by the government of India which controls over 63 percent stake therefore BHEL has a high percentage of revenue coming from government projects.
- The company currently has 16 manufacturing units two repair centers eight service centers along with the infrastructure to deal with 150 plus project sites across the world.
- BHEL has a project footprint in 83 percent plus countries in the world and is currently executing six gw projects in 12 countries.
- The company also spends significantly on research and new project development.
- Their R&D expenditure is 2.5 percent of the revenue which is the highest in the Indian engineering field
- the business model is also asset-heavy and requires intensive capital investment along with technology.
- How hence the entry of new players is not easy.
- However, the competition between the existing firms is intense and the private players have technical superiority.
- Therefore this category gets three stars in BHEL fundamental analysis.
Business Model and Management
- The company has four major business segments called power, transmission, transportation and, renewable energy.
- The power segment involves the execution of power projects from concept to commissioning it includes emission control equipment, gas turbines, hydropower generators, and nuclear sg, and tg sets up to 700 MW.
- The transmission segment includes a wide range of transmission systems and products including EHV and UHV that are extra and ultra-high voltage.
- The transportation segment includes traction propulsion equipment like railway, electrification, locos emus and, metro coaches.
- The renewable energy segment has EPC, solutions, for ground-mounted, and rooftop solar power plants.
- Overall the business model is well diversified with a focus on core business revolving around power generation, and transmission.
Leadership
- Dr. Nalin Shinghal is the chairman and managing director of BHEL.
- He is well known for turning around the central electronics limited cell and making it a profitable company again.
- He was appointed in FY2019 to do the same for BHEL and bring it back on the path of sustainable growth and profitability.
- Mr. Shashank Priya is presently posted as additional secretary and financial advisor as and pha in the ministry of commerce and industry.
- He represents the government’s interest on the board.
- Overall the company has qualified management that is focused on turning around the company.
- Therefore this category gets three stars in the fundamental analysis of BHEL.
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Company Financials
Company Financials of BHEL are as follows:
Growth Ratios
- The revenue has shown a decline since FY2013 and both the operating income and net income has reduced over the years.
- The working capital is decreasing and the capital expenditure is also flattened.
- Overall the company has shown negative growth over the years.
- Therefore this category gets only two stars in BHEL fundamental analysis.
Profitability Ratios
- The gross margin has been decreasing at a slow rate due to the increasing material costs.
- The other margins showed a decline since FY2012 and went negative in FY2016.
- This was because of the inadequacies of efforts for diversification increasing competition and improper management of receivables by the company BHEL.
- However, managed to become profitable again with improved management and new orders from the government.
- Therefore this category gets three stars in BHEL fundamental analysis.
Cash Flow Ratios
- The capital expenditure has been curbed by the company for improving profitability but this has a negative impact on future growth.
- The free cash flow and operating cash flow have also seen a decline.
- Overall the cash position of the company has deteriorated over the years and has not shown any signs of recovery.
- Therefore this category gets only one star in BHEL fundamental analysis.
Liquidity and Solvency Ratios
- The financial leverage and debt to equity have almost remained flat for the company in recent years but the EBITA margins have reduced.
- This impacts negatively on the solvency of the company
- The current ratio and the quick ratio have also decreased which means increased short-term liabilities.
- This impacts the liquidity of the company.
- Therefore this category gets only two stars in the fundamental analysis of BHEL.
Efficiency Ratios
- Business efficiency has improved over the years.
- The inventory days have gone down from 184 to 151 and the receivable days has gone down from 225 to 170 days.
- The cash conversion cycle has reduced significantly from 266 to 90 days but it is still not negative.
- Hence the company needs additional working capital or short-term financing for daily operations.
- Therefore this category gets three stars in fundamental analysis of BHEL.
ROE and ROCE
- The leverage has shown a slight increase in recent years and the asset turnover has flattened.
- The operating margin has shown some signs of recovery along with the interest burden ratio.
- This has led to the recovery in the return on equity in the recent years.
- However further improvement would be difficult for the company as it is facing strong competition from private players.
- Therefore this category gets two stars in fundamental analysis of BHEL.
The shareholding Pattern of BHEL are as follows:
- If you look at the shareholding pattern.
- Its promoter has more than 63.17% stake in the company.
- Foreign institutions hold a 4.67% stake.
- Domestic institutions hold 12.39% stake.
- General public holds a 19.76% stake.
Future Growth Prospects
- Some insights for the coming years from the analysis management discussions and con calls are as follows:
- The new management led by Dr. Nalin Shinghal replaced Mr. Atul Sobti as the ceo of the company in FY2019.
- The management change is due to the deteriorating financial health and plans for turnaround.
- Dr. Nalin Shinghal has previous experience in such cases and he is known for his well-known turnaround of cell.
- The covid 19 situation will not impact any projects as they are large engineering projects.
- However revenue impact could be there due to factory shutdowns and decreased government expenditure on infrastructure in the future.
- National Infrastructure Pipeline nip plans of overall thermal capacities going up.
- Hence old power plants would shut and, new power plants will be commissioned to start 48 gigawatt worth of opportunity exists for bhel.
- If this happens out of the total inr 1.07 trillion government order boo, bhel is favorably placed in around inr 130 billion worth of orders inr 105 billion in power inr 9 billion in industrial, inr 17 billion in international employee headcount.
- Currently stood at 34 management expects around to 600 employee retirements every year also the company is trying to bring down its fixed costs which currently form 75 of the total expenses.
- BHEL has growth opportunities but they are mainly driven by government projects which do not have significant profitability.
- The company is also facing strong competition for private projects.
- Therefore this category gets two stars in fundamental analysis of BHEL.
The overall rating is arrived at by taking the average of the above 10 category ratings and round it up if it is above 0.5 and rounded down if it is below 0.5. The overall fundamental rating BHEL shares 2.3 5. Therefore it is a two-star stock.
Valuation
- The company has seen a continuous decline in the valuation multiples as the market has factored in the gradual loss of profitability and weakening growth prospects.
- The company however is planning to turn around and focus on core business growth but this is highly uncertain due to increased competition.
- Hence the valuation multiple may also not witness any significant increase in the coming years.
- Therefore this category gets two stars in BHEL fundamental analysis.
Conclusion
Overall if we conclude BHEL Ltd has an excellent business and its management, strong competitive advantage and solid financial, and a very bright growth prospect which makes it a fundamentally super strong company.
It is currently available at a fair valuation. What is your take on BHEL Ltd have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.
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