Bharat Heavy Electricals Limited: A Wounded War Warrior.

Stock price of BHEL is out of power. It is around its multi-year lows. So many friends are asking for a view as many are at losses and some wants to invest.

I am a proud employee of BHEL. Our company is in tough weather…I am using the word weather because weather is mostly “imposed” on us; it is not the result of our actions. Power sector in india is grappled with double whammy, there is surplus capacity and still huge unmet demand. So we can see that problems are structural not commercial. Distribution losses are huge due to erratic and shabby state power distributors (I remember BSNL) whose poor health refrain them from supplying the power to the consumption points. Power plants are financed by banks which have short term focus…we should finance these with long term infrastructure bonds which are tradable. Moreover everybody jumped into building power plants; even newspaper wala was trying to make a story out of it although COAL is never suited for writing but ink. As these inexperienced players were building power plants with no expertise in running a power plant, no financial strength to withstand any variability instead they were heavily loaded with high cost debt  so they were bound to falter which they did and now they are selling their incomplete power plants for which there are not many takers.

Aggressive bidding even by some established players further aggravated the situation. Some of them even made their calculation of bidding at low per unit costs on the basis of imported Indonesian coal where they never factored for a possible rise in the cost of coal. They even left the possible fall in rupee which could even out any fall in the global coal prices. There was no plan B. But Indonesia raised the prices of exported coal which resulted in the first assault which severed the base.  And when coal prices fell globally, fall in the value of rupee even out any possible benefit out of the fall in coal prices.

This is further impacted by the not so fast growth in manufacturing in india as compared to the growth in capacities in power sector. Indian power sector also witnessed unbalanced investments with heavy investments into generation but very less in transmission and distribution. Building one megawatt of transmission and distribution capacities costs as much as of building production capacity of one megawatt. But grid capacity in india is very inadequate and unreliable. So there are situations when North india is deficient of power and there is surplus power in south and western india but it is of no use for North india as there is no transmission Grid.

So we see here our power sector inflicted by multifaceted issues. I have always felt that slowdown or recessions are mostly the results of misallocation of productive resources. To repair this misallocation, we need to bear the pain of fall of some of pillars of a royal palace as too many pillars hinder the free movement. So some pillars will eventually fall in our power sector.

This is consolidation phase in power sector where big and mighty will survive; inefficient players are going to disappear in this survival game. First margin will disappear in a last attempt to breathe. Right now we are in this margin phase as everybody is bidding low for new orders. Even the margins of BHEL are down heavily and may down even further. But after this correction, only the efficient ones will remain. In power generation, NTPC and Tata power will emerge as leaders with Reliance, Adani distant seconds. BHEL will remain the leader among power producers. It is still capturing around 70% of the orders every year even in these difficult times although at lower margins. But this is part of the game.

Recessions are always helpful in eliminating the unnecessary additions; they bring out the best in the efficient who then focus on sharpening their skills and shedding the heavy unproductive fat. BHEL is not just a power producer but is a significant player in indian defence, transmission and transport sector which account for around 20% of its turnover and these are the other areas which BHEL is going to focus on in its current resurrection.

Not many may be aware of this but BHEL is the main supplier of solar panels and Lithium ion Cell batteries for the satellites of ISRO. These require very advanced technical expertise. BHEL is doing this for ISRO in its Bangalore unit from 2002 for solar panels and from 2005 for batteries. BHEL can garner bigger share in indian defence sector due to its inherent but unused technological strength. Like BHEL is supplying naval guns to Indian Navy and now it is looking for some technology partner for making even bigger guns.  BHEL has also formed a consortium with two other PSUs, Mishra Dhatu Nigam and Hindustan Shipyard, to build submarines indigenously. They are planning for bidding for submarine order, the order value of which will be around 50000 cr. One can imagine the possible scale.

BHEL was also having big investment plans ( may be around 2000 cr) for solar business but I think they may have to shelve the same due to Chinese onslaught and lower demand for solar power but situation is changing now. As I have explained in my post on Gujarat Borosils about solar power that at present there is no solar manufacturing capacity in india, there is only low value assembly capacity and BHEL is best suited to start the solar cell and panel manufacturing in india as it is already doing it albeit at lower scale.

In railways BHEL provides electrical propulsion system and its controls and accounts for more than 40% of electric locomotives in operation by Indian Railways. As we know Railway is another face of india which needs big makeover and we will see huge investments in the sector in the near future.

BHEL is spending around 3% of its turnover on R&D which is the highest in its kind of industry in india. BHEL has around 1400 patents to its credit and has world class technology giants as its business partners.

So I don’t think that time is over for BHEL, in fact it is time for making one more relevant and efficient.  BHEL is debt free with around 10000 cr cash; it can speed up its pace and build up muscles anytime.

No doubt BHEL is wounded because its war time. So only those should invest here who like to witness a war and have the will power to withstand some wounds.  

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and not holding the stock discussed in this Post)