Divestment is the key... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Divestment is the key...

Jun 10, 2000

What would you call a company operating 12 manufacturing facilities across the country manufacturing transformers, traction motors, thermal sets, locomotives, gas turbines, boilers and boiler auxiliaries, wind mills, heat exchangers, insulators, capacitors, compressors, oil field equipment, power devices, defence equipment, control gears, light aircrafts…..? Whew! A behemoth, a super company, a giant. Simply put, the company in question is Bharat Heavy Electricals Limited or BHEL, India's largest engineering enterprise and one of the major power plant equipment manufacturers in the world.Consider BHEL's FY2000 performance. Highest ever order inflow, at Rs 72 billion, despite depleted market and operating under intense competitive pressure in domestic and international markets. This comprised single largest order for main equipment for 4x500 MW Talcher thermal power project, bagged against international competitive bidding. Seventh consecutive order for a 120 MW unit for expansion of NALCO's captive power plant at Angul. India's largest capacity AFBC Boiler (2x165 tonnes/hour) order for a captive power plant in Madhya Pradesh.

Key pointers
Rs millionFY99FY00
Orders Inflow 58,350 72,140
Turnover 67,946 66,200
PAT 5,446 5,250
NAV per share (Rs) 126 135
Generating capacity added (MW)2,754 MW3,582 MW

Its overseas business comprised of largest ever export order for 2x159 MW ISO gas turbine generating units from Iraq, turnkey orders for large size gas turbine based power plants (124 MW) from Oman and Bangladesh, so far the forte of a few companies from the developed world. That's not all. A maiden entry in Azerbaijan, with an order for a hydro generator package and highest rating hydro sets (with Pelton turbines) order for 6x170 MW Tala - the largest hydro power project of Bhutan added to the feathers in its cap.

To top it all, BHEL bagged the top exporter award for outstanding export performance for the 11th year in succession from amongst public and private sector companies in India.

Based on all this, one would have expected the company to be a darling of investors and fund managers. Instead, the stock has been hammered to it lowest ever lows in the recent months. The company has reported staid earnings of Rs 5.3 billion on a turnover of Rs 66.2 billion in FY2000. This is marginally lower than its FY99 earnings of Rs 5.4 billion on a turnover of Rs 67.9 billion. Earnings Per Share (EPS) during the year was Rs 21.4 (22.0 in FY99). The only shining star in its FY2000 results was physical exports, which jumped to Rs 3,300 million from Rs 710 Million in FY99. It currently trades at a price to earnings (P/E) multiple of 6.1 (14.4 times in FY99).

Being a Public Sector Unit (PSU), the company is subject to various rules and regulations, which act as a hindrance in its efforts in becoming a dominant player in the world markets. Its employee productivity is low due to its bloated workforce of 60,000 employees. Being a PSU, it cannot easily retrench these employees, thus making it lose its competitive edge. In FY2000, employee costs constituted almost 21 percent of its turnover and about 23 percent of its total expenditure.

In the wake of all this, BHEL finds it increasingly difficult to maintain market share in the face of competition from international majors like Siemens, ABB, Cogentrix etc. who have global experience and access to large technical and financial resources.

While no one doubts the technical capabilities of BHEL, investors feel that the company has spread its wings too wide. BHEL currently manufactures almost all the components for power generation and transmission equipment in house. The company is thus unable to exploit the cost savings that would arise on outsourcing components, while it could concentrate on assembly and design, which will add more value to its bottomline.

BHEL is the leading equipment supplier for power generation in India. It has so far supplied generating equipment for 65% of India's total generating capacity. It was expected that with the initiation of power sector reforms in India, there would be substantial jump in investments into this sector, which will benefit BHEL. This has yet to happen, mainly due to the regulatory hurdles and the weak financial health of the state electricity boards, which has adversely affected growth of the company.

All said and done, it does not imply that all is over for this engineering behemoth. BHEL is taking steps to improve overall efficiency and productivity. The company through its voluntary retirement scheme has been able to shed about 8,000 workers in FY2000. Moreover, the company has entered into technical tie-ups with various international companies like Babcock Borsig Power GmbH, Germany - one of the technology leaders in once through boilers and also with Apparatebau Rothemuehle Brandt + Kritzler Gmbh, Germany, for the manufacture of state-of-the-art pollution control equipment called 'Fabric Filters'. It has also tied up with Siemens to carry out renovation and modernisation of power plants in India. This business has large scope in India, given the existence of a large number of old plants and the generally low capacity utilisation levels due to technological constraints.

Divestment by the government is also in the offing. Once that goes through, there will be nothing stopping this Indian engineering wonder.

Equitymaster requests your view! Post a comment on "Divestment is the key...". Click here!

  

More Views on News

BHEL 2020-21 Annual Report Analysis (Annual Result Update)

Oct 19, 2021 | Updated on Oct 19, 2021

Here's an analysis of the annual report of BHEL for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of BHEL. Also includes updates on the valuation of BHEL.

BHEL Shares Tumble 18% on Disappointing March Quarter Results (Views On News)

Jun 14, 2021

BHEL's net loss narrowed to Rs 10.4 bn in the March 2021 quarter.

Infrastructure Boom Ahead. Here are 3 Ways to Play It... (Views On News)

Aug 24, 2021

India is expected to become the third largest construction market next year. For that, it needs huge investments.

G R Infraprojects Makes a Bumper Listing on Bourses. Big Gains for IPO Investors (Views On News)

Jul 19, 2021

GR Infra shares were subscribed over 100 times in its IPO.

Here's Why the Stock of Ashoka Buildcon was in Focus Today (Views On News)

Jul 13, 2021

Ashoka Buildcon shares up on bagging NHAI project.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

How to Hit Rs 100 Crore Wealth in Your Lifetime (Equitymaster Wealth)

Nov 15, 2021

This is how you can achieve the ambitious goal of a net worth of Rs 100 crore.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

BHEL SHARE PRICE


Nov 26, 2021 (Close)

TRACK BHEL

BHEL - ACTION CONST. COMPARISON

COMPARE BHEL WITH

MARKET STATS