Stalled projects likely to pull down BHEL from June high

NEW DELHI: The pickup in project execution, lower provisions and better cost control helped BHEL accelerate its revenue growth by 29% in the June quarter and beat analysts' expectations by a wide margin. The extent of earnings propelled the stock up 8% after the results were announced on Wednesday .

The higher revenue was driven by a focus on executing jobs at hand rather than an uptick in execution of slow-moving jobs. Besides, reduction in other expenses (provisional write-back of `48 crore) and stable employee cost after retirement of 2,700 people in 2015-16 gave a boost to operating profits.

Investors are wary that revenue growth in the quarter appears unsustainable due to limited clarity on the pace of execution. Out of the total order backlog of `1.1 lakh crore in June, nearly half is slow-moving and inadequate to drive revenue beyond `28,000 crore in FY17. This implies revenue growth will not be more than 15% in FY17 and 7.5% in FY18.

Projects worth `30,000 crore are stalled due to pending clearances, worth `6,000 crore as start date is not finalised and worth `14,000 crore are truly stalled. Given slow-moving orders, the backlog has a sizeable share and limits prospect of revenue growth in the coming months.

In a post earnings conference call, the company mentioned only the target of memorandums of understanding (MoU) with the government. However, the management remains non-committal on the trajectory of revenue growth. Revenue growth of more than 15% hinges on clearance of orders of `30,000 crore in Telangana and Tamil Nadu. It expects clearance of three large projects within two-three months.

As for fresh orders, analysts expect inflows to drop 10-15% in FY17.

The stock has rallied 34% in the past three months and is trading at a valuation of 20 times of its projected FY18 earnings. The valuation may appear expensive due to its presence in the oversupplied market, high receivables, slow-moving backlog and looming wage provisions.