The company is in the complex business of making equipment for power generation entities, but the bulk of the power suppliers are government owned as yet. It thus has to contend with all the problems that come with such a ground reality.
A humungous operation
Bharat Heavy Electricals (BHEL) is big, and real big at that. It is also 48 years young as a corporate entity. The company ushered in the indigenous heavy electrical equipment industry in our very own Bharat. It is engaged in the design, engineering, manufacture, construction, testing, commissioning and servicing of a wide range of products and services for the core sectors-power, transmission, industry, transportation, renewable energy, oil and gas and defence. It makes do with 15 manufacturing divisions and two repair units along with a host of other offices within and without the country.
In power generation it is the largest manufacturer in India - and it is a very creditable achievement given the competition. But on the flip side it also benefits from the most favoured vendor concept. It supplies a wide range of products and systems for thermal, nuclear, gas and hydro based utility and captive power plants. The company claims that the power generation equipment manufactured by it accounts for 59% of installed capacity of around 1.80 lakh MW in the utility sector across the country and that these sets accounted for 69% of the electricity generated in 2011-12. In the 11th Plan it commissioned 25,385 MW of utility sets, nearly double of that contributed during the previous plan. It is a leading manufacturer of a variety of industrial systems and products to meet the demands of a number of industries. It also supplies equipment for the railways whether diesel powered or electric powered, and it develops and promotes renewable energy products including solar power lighting. It also manufactures and services a variety of oil rigs, and makes a wide range of power transmission equipment. Then there is the international business to oversee in some 75 countries across the globe. It is a very broad canvas to paint on. The company also makes do with two siblings and seven joint ventures, but more on this later on in the copy.
A maharatna company
It is big, real big for sure. It is also a central public sector undertaking which somehow missed the bus in attaining the exalted 'maharatna' status. It is a part of the second rung of 'navaratna' companies. There are five companies in the top list and 16 in the second list. (The word navaratna has however long since lost its meaning). The central government through its proxy the President of India holds a predatory 67.7 % of the outstanding voting capital of Rs 4.89 bn comprising of equity shares of the face value of Rs 2 each. (In the preceding year the shares had a face value of Rs 10 each, which infers that the company gave a mini bonus issue of shares during the year -- in a manner of speaking). The LIC, which is but another adjunct of the government, holds another 5.8% of the outstanding stock. Interestingly, the foreign institutional investors (FIIs) hold close to 13.5% of the outstanding equity - up from 12.9% in the preceding year end. This is a point worth noting. Further, fully 50% of the shares on tap are on account of bonus issues.
Against the miniscule paid up capital, it boasts reserves and surplus of Rs 248 bn. Almost the entire reserves consists of either general reserves, or surplus lying in the P&L account. The total assets weigh in at Rs 668 bn at year end against Rs 593 bn previously. The gross revenues from operations clocked in at Rs 495 bn. Then there is other operational income of Rs 7.5 bn and other income of Rs 12.6 bn making a total of Rs 515 bn. The most significant revelation among the many figures is that the debt - both short term and long term collectively amounts to almost zilch - even given the scale of operations. The total debt at year end, including current maturities of lease finance, amounted to a mere Rs 1.9 bn against Rs 1.6 bn previously. Not to be forgotten here is that the pre-tax profits before prior period adjustments amounted to Rs 103.2 bn against Rs 90 bn previously. The plus factor to be factored in here is that the company is not a very capital intensive operation, for a manufacturing unit of its complexity. This is partly because a slice of its revenues emanates from erection & engineering services. The gross block including capital work in progress at year end amounted to Rs 110 bn against Rs 97.7 bn previously. This year end gross block figure infers that the gross block to gross revenues from operations cranks out a ratio of 1: 4.5 - the same as in the preceding year. But, the accumulated depreciation on the plant and machinery, the biggest item of gross block by far amounts to over 56%.
So how does it make it all possible? Before we get into that, some points on the P&L account are worth noting. The turnover gross of excise rose 14.2% to Rs 495.1 bn. This is inclusive of income from 'external erection, and revenues from works contract' of Rs 53.62 bn. (It also includes earnings in foreign exchange including deemed exports of Rs 144 bn against Rs 92.2 bn previously - and the company is forex positive at the end of the day). In other words exports weigh in as a bulge bracket item in the revenue earning exercise. But surprisingly the export incentives that it has booked during the year is a measly Rs 120 m against a much larger Rs 429 m previously. Revenues net of excise on the other hand rose 13.6% to Rs 472.2 bn. Other operational income consisting largely of both scrap sales of Rs 3.1 bn, and an innocuous item called 'others' amounting to Rs 4.3 bn. Totally it added up totally to another Rs 7.5 bn. Income from such heads of account is at best very tenuous, and cannot necessarily be depended on for a repeat performance. It is another matter though that the company's generation of such income in the latter year is more than that of the preceding year. Then there is 'other income' amounting to Rs 12.7 bn. This income is definitely not small change by any reckoning. It of course includes vague items like exchange variation receipt of Rs 990 m, grants from the GoI of Rs 3.3 bn, and also bank interest income of Rs 7.86 bn. There is also dividend income of Rs 169 m. Such other income again is very susceptible and cannot necessarily be depended on for an encore in the succeeding year. But as with the operational income, the company recorded more other income in the current year than in the preceding year. It may be pertinent to add here that such other income including operating income accounted for close to 20% of the pre-tax profit for the year against 19% previously. (Other income in any form or colour does not have any operational revenue expenditure to contend with).
Such other income definitely helped to buoy the bottom-line. Though the net revenues (net of excise) from operations rose 13.6%, the cost of material inputs rose far more sharply by 21.7% to Rs 280.8 bn. This large increase in consumption costs is possibly due to the dependence of imported materials in total consumption. The imported raw materials, components, stores and spares accounted for 32% of all material consumption. And the rupee is yo-yoing against major foreign currencies. What saved the day was its ability to control the cost inputs of two major expense items. Miraculously enough, the second largest expense item - employee benefit expenses - rose only a mere 1.3% to Rs 54.6 bn. The other big ticket expense items - administration expenses and provisions together actually declined 12% to Rs 46.2 bn. The control on these two expense items, and the other income factor helped to tip the scale in its favour. The company very sensibly decided that it could make do with much lower provisioning during the year as compared to the preceding year. Provisioning is after all a very subjective expense item and can be twiddled around with.
On a segment wise basis, the revenues are divided under two heads of account - Power and Industry. The power segment brings in the bulk of the receipts - at 76.4%. The industry segment brings in the balance 23.5%. But on a segmental profit basis the power sector contributed a smaller 71% while the industry segment brings in 29%. On a segmental assets basis, the contrast is starker. The power sector earned a margin of 18.5% against a return of 25% for the industry sector. It does not proffer a separate working of its export effort. (Different schedules show vastly different figures on the outside India revenues on the one hand and the export earnings on the other). But the moot point is that the export effort also benefits from sizeable credits that the government proffers on the indirect taxation and to some extent on the direct taxation front, and could therefore have a significant bearing on the bottom-line creation.
Anyways, the issue is that a company which manages to do with close to zero debt, and better still with an interest outflow of only Rs 512 m against Rs 547 m previously, has got to be a profitable enterprise. The interest payout relative to the year- end debt also implies that the company borrows some during the year for working capital purposes, which is paid back before the year end. Where the company scores very well is in its ability to receive advance moneys from 'customers and others'. It is not known who the 'others' constitutes, but the 'advance' that the company was able to browbeat customers into parting with amounted to a Rs 131.5 bn at year end against Rs 117.2 bn previously. This advance is shown under current liabilities - meaning a less than 365 days duration. Separately there is an entry of 'advance' received under 'long term liabilities' amounting to Rs 68.3 bn. Thus the total advances received that it has under its belt at year end mounts to a humungous Rs 200 bn against Rs 204 bn previously. Seen from a different perspective this sum of Rs 200 bn adds up to a little over 40% of the gross revenues for the year. This advance is not exactly money for jam, and is in reality a 'double edged sword' to use a metaphor. If the company is able to rifle up advances from customers, it in turn has to pay 'advance' for purchases too. At year end the advance for purchases amounted to Rs 4.2 bn - thankfully enough it is small beer compared to what it can garner in turn.
Working capital management
Consider the following stats. There are two entries under the head of trade receivables. There are trade receivables of Rs 263.4 bn under the head 'current assets', and long term trade receivables of Rs 115 bn under the head of 'other non - current assets'. Thus the total trade receivables amount to Rs 378.4 bn against Rs 286 bn previously. As one can see this consolidated figure is a lot larger than the advance received for goods and services to be delivered by the company. Thus the net trade receivables amount to Rs 178.4 bn (Rs 378.4 bn - Rs 200 bn) against Rs 83 bn previously. Thus the net trade receivables in the latter year amounts to less than 0.40% of the total revenues derived from operations during the year. Such figures can only be trotted out by market leaders. This percentage dues also makes for a substantially better performance than in the preceding year. This ratio however excludes provision for bad and doubtful debts under both heads of trade receivables. Separately there are also provisions for liquidated damages and doubtful heads under a separate head called 'provisions' which have not been tallied in. These latter figures are not exactly small change or something.
In comparison to the net trade receivables, the net trade payables at year end amounted to Rs 102.7 bn against Rs 81 bn previously. So the company is very much in positive territory here. Inventories at year end amounted to 27% of gross revenues from operations, against 25% previously. But the gross current assets (excluding cash) relative to the current liabilities is on the high side. The gross current assets weigh in at Rs 420.4 bn against the gross current liabilities of Rs 287.2 bn, leading to net current assets of Rs 133 bn.
This high level of monetisation of current assets even led to a piquant situation on the cash flow front. The sharp increase in trade and other receivables, and in inventories, over that of the preceding year, led to a sharp fall in cash inflow from operations. And setting apart moneys for income tax, the company was actually out of pocket to the tune of Rs 8.1 bn, against a positive flow of Rs 26.5 bn in the preceding year. With the company also having to contend with the purchase of fixed assets, investments in its siblings and JVs, and the compulsory payment of dividend to shareholders, the company was actually out of pocket to the tune of Rs 29.6 bn. What saved the day for the company was the abundance of cash at its disposal. The company ended the year with cash and cash equivalents of Rs 66.7 bn against Rs 96.30 bn at the beginning of the year. (The company earned Rs 7.9 bn as interest income from banks during the year against Rs 6.1 bn previously). The accounts department is for sure coming up with a fine display of its talents.
Fortunately for minority shareholders its portfolio of stocks is limited to a book value of Rs 4.61 bn. This includes its stake of Rs 54 m in two sidekicks, Bharat Heavy Plate and Vessels, and BHEL Electrical Machines. The investment in the former appears to a total gone case for now with no book value at all. But there is a separate entry in the investment schedule showing an advance of Rs 340 m to this company - the same as previously. Then there are its investments in eight power company JVs amounting to Rs 4.16 bn, with one investment having no book value at all. The total dividend inflow on all its investments amounted to Rs 169 m. Not exactly the type of return that the investment consultant would have mandated but this is the reality. It is not known immediately which of the investments are yielding any return - but it may have emanated from one of the power JVs. The company has also advanced loans to its siblings amounting to Rs 2.2 bn. There does not appear to be any separate accounting of any interest receipts for these loans that it has advanced. But the company does collect its tithes in other ways from its JVs. It sold goods and services to them amounting to Rs 6.5 bn during the year. The parent in turn purchased goods and services from them amounting to Rs 980 m. But the most interesting aspect of the year-end figures of transactions between the parent and its JVs is the dues to BHEL and the dues from BHEL. At year end the dues to BHEL amounted a hefty Rs 10.22 bn while the dues from BHEL were a less hefty Rs 5.95 bn. These figures seem to have no bearing whatsoever with the sales to BHEL and from BHEL. This is bordering on the bizarre.
Bharat Heavy Plates and Vessels is a chut muut company which generated revenues of Rs 1.55 bn during the year and it posted a pre-tax profit of Rs 104 m. But this working hides a stark reality. It is on the sickbed and it boasts accumulated losses of Rs 2.53 bn on a paid up capital of Rs 337 m. The company is grossly cash strapped and it survives on handouts, includes doles to the tune of Rs 2.19 bn from BHEL. Quite obviously this loan is a freebie.
The second sibling is BHEL Electrical Machines Ltd, and it is a JV between BHEL and the Kerala State Govt. Very sensibly BHEL wrested control of 51% of the voting power in this venture. It also gets to inherit the left over assets of an erstwhile company called Kerala Electrical and Allied Engineering Company Ltd in the bargain. The company has just about got off the starting block with revenues of Rs 211 m, and a loss before tax of Rs 3.7 m. It has a paid up capital of Rs 105 m. BHEL shows its contribution of Rs 340 m as an advance in its books, towards the issue of shares. The two figures do not tally at all, unless this figure pertains to additional capital infusion or some such. BHEL has also advanced a small loan of Rs 17 m to this outfit. And, going by the performance pattern of other listed manufacturing companies in Kerala, do not expect much from this outfit either.
Not much is known of the financial status of its JVs, but being power manufacturing units in the making, and the capital intensive nature of its profession, they will have long gestation periods to contend with.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.
BHEL has announced third quarter results for the financial year 2016-2017. The company has reported an 18% YoY growth in sales, and a Rs 875 million net profit during the period. Here is our analysis of the results.