Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Negative/CRISIL A1+’ ratings on the bank loan facilities of Bharat Heavy Electricals Ltd (BHEL).

 

The outlook remains ‘Negative’ as the company’s continued stretched working capital cycle, along with utilisation levels exceeding 90% on average in the past 12 months, resulted in consistently positive net debt in the first half of fiscal 2025. Operating margin was weak at 0.9% in the first six months of fiscal 2025, though improved from operating loss of 7% in the corresponding period the previous fiscal. The debt is expected to remain elevated over the medium term due to continuously large working capital requirement. However, operating profit is expected to improve from fiscal 2025 because of better operating leverage, which will support the increased working capital needs. Pace of order execution and the impact on the working capital cycle, and improvement in the operating profitability will be monitorable.

 

BHEL saw the highest inflow of orders in the past year, with orders of ~Rs 1.60 lakh crore as on September 30, 2024, driven by power sector orders and increased opportunities in industrial segments, thus providing strong revenue visibility. Uptick in orders and focus on execution will lead to substantial revenue growth over the medium term, this comes on the back of moderate growth of 2.3% recorded in fiscal 2024. In the first half of fiscal 2025, revenue grew 19% on-year. Furthermore, the ratio of legacy projects — which had suppressed operating margin in the past owing to their fixed-price nature and back-ended payment structures — in the overall order book is reducing. This will gradually lead to higher margins as new contracts have in-built price escalation and a better payment structure. Operating margin (post provisioning) is expected at 7-8% in the near term — the margin had moderated by 150 basis points to 2.6% in fiscal 2024 on account of increase in raw material prices that the company was unable to pass on to customers. Improvement in profitability will remain a key rating sensitivity factor over the medium term.

 

Although working capital cycle will remain stretched, CRISIL Ratings expects that with gradual reduction in the proportion of contract assets from the legacy projects, the net working capital cycle will ease from fiscal 2025. Short-term debt was high, ~Rs 9,000 crore as on September 30, 2024, and is expected to remain at similar levels in the near term due to large working capital requirement with increased pace of order execution. Despite the increase in the debt, leverage ratios such as gearing and total outside liabilities to tangible networth (TOLTNW) ratio are expected to remain comfortable at less than 0.4 time and 1.3 times, respectively, over the medium term. Interest coverage ratio is likely to improve to above 3 times from less than 2 times in fiscal 2024 driven by improvement in operating profitability.

 

The ratings continue to reflect the leading market position of BHEL in the BTG (boiler, turbine and generator) segment and its strong financial risk profile. These strengths are partially offset by structural issues in the power sector, longer execution cycle for the power projects and large working capital requirement. 

Analytical Approach

CRISIL Ratings has moderately combined the business and financial risk profiles of BHEL and its joint venture (JV). CRISIL Ratings has factored in net provisions to arrive at the operating profit before depreciation, interest and taxes.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leading position in the BTG and heavy electrical equipment markets: BHEL is the leading player in India's BTG and heavy electrical equipment markets, accounting for over 50% of the country’s installed capacity of conventional power projects. BHEL is a government entity with Maharatna status and has superior execution capabilities, which support its dominant market presence. Fresh orders from the power sector were above Rs 55,500 crore in fiscal 2024 compared with ~Rs 15,000 crore during 2023. BHEL had a market share of 800 MW in all the tenders floated in the thermal power segment in the past 18-24 months and most of the projects currently being implemented in the thermal power industry in the country are implemented by BHEL. Along with a leading position in the thermal power segment, BHEL has diversified into other areas such as hydropower, nuclear power, power transmission, defence, rail transportation, which will drive growth in the long run.

 

• Significant improvement in the order book providing strong revenue visibility: The company’s order book improved to Rs 1.60 lakh crore as on September 30, 2024, from Rs 1.30 lakh crore as on March 31, 2024. This was because BHEL received its highest ever order flow of ~Rs 78,000 crore in fiscal 2024. Orders of Rs 41,000 crore were received in the first half of fiscal 2025. Though 72% of the fresh orders were from the power division, the quantum of orders from the industry division (defense, railways, and coal gasification) increased to ~Rs 22,000 crore during fiscal 2024 (Rs 4,000-9,500 crore per annum during fiscals 2020-2023). The quality of the order book has improved significantly, with orders from high-growth sectors such as defence and railways (supply of Vande Bharat trains). In the power sector, though the share of thermal power remains high, share of non-thermal power orders is gradually increasing. This, along with better pricing flexibility and payment terms in the newer contracts, will support the operating margin and working capital cycle. BHEL has the capacity to deliver 10 GW (gigawatt) of thermal power projects (supercritical technology) per annum. Also, the Government of India plans to add 80 GW of thermal power by 2032. BHEL has already received tenders of 10 GW in fiscal 2024 and ~10 GW till the second quarter of fiscal 2025, and is expected to receive 15 GW of orders in the next 2-3 years from the thermal power segment.

 

• Healthy financial risk profile: The financial risk profile remained healthy despite increase in working capital debt to Rs 9,000 crore as of September 2024 from Rs 8,808 crore as of March 2024 and Rs 5,385 crore as of March 2023, on account of increased receivables (including contract assets) and early payment to creditors to secure raw material and avail of bulk discounts.

 

Despite increase in the debt. leverage ratios such as gearing and TOLTNW ratio are expected to remain comfortable, at less than 0.4 and 1.3 times, respectively, over the medium term. The interest coverage ratio is expected to improve to above 3 times from less than 2 times in fiscal 2024, driven by improvement in operating profitability.

 

Weaknesses:

• Structural issues in the power sector leading to delay in project delivery: The power segment has traditionally accounted for a majority of BHEL’s revenue. The company’s profitability, hence. remains exposed to volatility in the power sector and structural issues such as delays in land acquisition and environmental clearances, availability of fuel and funding, and weak financial position of many state power utilities, which were among its key clients. Over the past several years, such issues have slowed the execution of certain projects. However, the current orders of coal-based thermal projects include central and private utilities with strong financial position. Although BHEL has been focusing on diversifying its revenue by expanding into segments such as transportation, transmission, renewables, emission control and defence in the past few years, its performance will remain sensitive to the power sector, which forms majority of the revenue and order book.

 

• Large working capital requirement: BHEL continues to have sizeable receivables, including contract assets, resulting in high working capital intensity. The risk of doubtful receivables is largely mitigated by the provisioning policy of BHEL, and because around 80% exposure is to either central or state public sector undertakings. However, the company continued to have substantial exposure (~24%, including contract assets) to comparatively weaker state utilities such as Tamil Nadu Generation and Distribution Corporation Ltd (Tangedco) and Telangana State Power Generation Corporation Ltd as on March 31, 2024. A significant portion of current outstanding contract assets of the legacy orders, which carried back-ended payment terms, is likely to be released this fiscal and the next. Hence, the ability to improve receivables inclusive of contract assets, which stood at over Rs 26,500 crore as on March 31, 2024, on a sustained basis remains monitorable.

Liquidity: Strong

Liquidity is driven by cash and equivalent of around Rs 5,100 crore as on September 30, 2024, and commercial paper limit of Rs 5,000 crore that largely remain unutilised. The company has fund-based working capital limit of Rs 9,000 crore, which was utilised 96% on average in the 12 months through October 2024. The company has nil term debt. It plans annual capital expenditure of Rs 225-250 crore, which will be funded through internal accrual. Incremental working capital requirement will be funded through internal accrual and cash and equivalents.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes the environment, social and governance (ESG) profile of BHEL supports its already strong credit risk profile. The sector has a moderate environmental and social impact driven by high water consumption, and direct impact on the health and well-being of its customers.

 

BHEL’s focus on addressing these ESG risks supports its already strong credit risk profile.

 

Key ESG highlights:

• BHEL has set up nearly 34.895 megawatt peak (MWp) capacity of solar power plants, which has helped the company reduce electricity consumption. This large-scale solarisation has helped in reducing carbon footprint of 26,964 MTCO2 -equivalent during fiscal 2023.
• BHEL has installed 126 rainwater harvesting systems and 22 effluent treatment plants and 16 sewage treatment plants to manage grey water sustainably.
• The lost time injury frequency rate is zero and the company has addressed 100% of the customer grievances.
• Its governance structure is characterised by 20% of its board comprising independent directors as of September 2024. The position for chairman and CEO is not split. BHEL has a committee at the board level to address investor grievances.

There is growing importance of ESG among investors and lenders. The commitment of BHEL to ESG principles will play a key role in enhancing stakeholder confidence, given the high share of market borrowing in the company’s overall debt and access to both domestic and foreign capital markets.

Outlook: Negative

CRISIL Ratings believes BHEL’s large working capital requirement will keep its debt elevated, which may impact the financial risk profile. Improvement in the company’s profitability and working capital management will remain monitorable for the near term.

Rating sensitivity factors

Upward factors:

•       Sustained increase in scale of operations, with Ebitda (earnings before interest, taxes, depreciation and amortisation) margin at 7-8% on the back of higher-than-expected order execution
•       Improvement in the working capital cycle and decline in gross current assets with reduction in contract assets outstanding.
   

Downward factors:

• Weakening of the business risk profile through low order intake or delay in execution of orders, resulting in reduced scale of business
• Operating margin remaining below 3% on a sustained basis
• Continuous increase in debt leading to moderation of leverage ratios, especially TOLTNW ratio weakening to above 1.8 times

About the Company

BHEL is an integrated power plant equipment manufacturer. The Maharatna public sector enterprise is one of the largest engineering and manufacturing companies in India. The Government of India holds 63.17% of equity in BHEL.

 

BHEL has operations in the power and industry segments. The power division supplies power plant equipment such as turbo generators, boilers, turbines and accessories, and erects all types of plants based on gas, coal, hydro, nuclear and solar power. The industry division caters to diverse sectors such as process industries, transportation, power transmission and distribution, and defence. BHEL designs, engineers, manufactures, constructs, tests, commissions and services a wide range of products. It has 16 manufacturing units and three active JVs. It has a widespread overseas footprint with references in 90 countries.

Any other information: Not Applicable

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Raichur Power Corporation Ltd	Equity Method	Business and financial linkages
BHEL-GE Gas Turbine Services Private Limited	Equity Method	Business and financial linkages
NTPC-BHEL Power Projects Private Limited	Equity Method	Business and financial linkages

As per March 2024 balance sheet