Detailed Rationale

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

 

The outlook remains ’Negative’ as the earnings before interest tax depreciation and amortisation (EBITDA) margin adjusted for provision is yet to turn positive and the likelihood that profitability may remain constrained amidst increased input cost and continued stretched working capital cycle.

 

Revenue grew by 24% during fiscal 2022 owing to increased execution as the economic activities reached near-normal levels compared to previous year disruption on account of the Covid-19 pandemic. With increased revenue, EBITDA margin turned positive to 3.5% in fiscal 2022 compared to negative EBIDTA; however, a large part of the improvement is due to reversal of provision claims aggregating Rs 1,526 crore in fiscal 2022. EBITDA pre-provision continue to be negative at Rs 790 crore compared to negative Rs 1,668 crore a year ago. Turnaround in profitability of core operations will remain key rating sensitivity factor.

 

The working capital cycle though improved continues to be on the higher side due to sizeable receivables (including contract assets) owing to backend payment structure. Furthermore, timely payments to micro, small and medium enterprises limit flexibility to fund working capital by stretching payables. The management’s focus on improving collections along with various cost-rationalisation measures could partially support cash balance and will remain key monitorables.

 

CRISIL Ratings has noted the various initiatives taken by BHEL such as Quality First, strategies to control raw material cost, focus on cash collection, and exploring new opportunities to diversify revenue base away from the power sector. However, these efforts are yet to fructify and could be visible in terms of financial performance only over the medium term, and would thus be a key monitorable.

 

The ratings continue to reflect leading market position of BHEL in the power generation and electrical equipment markets, and strong, but moderating, financial risk profile. These strengths are partially offset by structural issues in the power sector (which contributes 70% to revenue), large working capital requirement and exposure to intense competition

Analytical Approach

CRISIL Ratings has moderately consolidated the business and financial risk profiles of BHEL's joint venture (JV), Raichur Power Corporation Ltd (RPCL), and has not considered any other subsidiary or 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 power generation and electrical equipment markets: BHEL is the leading player in India's power and industrial electrical equipment market, accounting for over 50% of the country’s installed capacity of conventional power projects. The government entity status, along with superior execution capabilities, support its dominant market presence. The company is well poised to benefit from any structural recovery in the power sector. However, timely execution of orders and realisation of receivables remain critical as operational challenges persist.

 

• Healthy order book: Order intake improved to pre-Covid levels (Rs 23,693 crore) during fiscal 2022, leading to healthy order book of Rs 1,02,542 crore as on March 31, 2022, thus providing revenue visibility over the medium term. Some of the large orders received during the year were from Nuclear Power Corporation of India Ltd for supply of reactor header assemblies and engineering, procurement, and construction (EPC) order of TG Island. The company is also focusing on non-coal business orders such as railways, defence, nuclear, emission control, transmission and rural electrification sectors. Order inflow and profitability remain key monitorables.

 

• Strong, but moderating, debt protection metrics: Financial risk profile--though moderating over the years--remains comfortable, backed by large networth and nil term debt. Liquidity, supported by the available cash balance and unutilised bank limit, is sufficient to fund working capital and capital expenditure requirements over the medium term.

 

Weaknesses:

• Structural issues in the power sector: The power segment has traditionally contributed to 70-80% of BHEL’s revenue. Profitability remains exposed to volatility in the power sector and structural issues such as excess capacity restricting further expansions, delays in land acquisition and environmental clearances, availability of fuel and funding, and weak financial position of many state power utilities, which are key clients. Over past several years, such issues have slowed the execution of certain projects. Although BHEL has been focusing on diversifying revenue by expanding into segments such as transportation, transmission, renewables, emission control and defence in the past few years, its performance would remain sensitive to the power sector, which forms majority of revenue and order book.

 

• Large working capital requirement: BHEL continues to have sizeable receivables, 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 continues to have substantial exposure of around 41% (including contract assets) to comparatively weaker state utilities such as Tamil Nadu Generation and Distribution Corporation Ltd and Telangana State Power Generation Corporation Ltd on March 31, 2022. Ability to reduce receivables on a sustained basis thus remains a key monitorable.

 

• Exposure to intense competition: BHEL operates in an increasingly competitive market as several domestic companies have entered the boiler-turbine-generator space through strategic JVs with international players, increasing the industry capacity to over 30 gigawatt (GW). Limited capacity addition to power plants is planned over the medium term. BHEL has remained competitive because of its significant presence in the supercritical technology-based thermal power business, driven by its collaborative approach, capability enhancement and accelerated project delivery. Nonetheless, few large orders in the past 2-3 years saw aggressive bidding and competition between supercritical equipment manufacturers will keep pricing and profitability range-bound.

Liquidity: Strong

Liquidity is driven by cash and cash equivalent of around Rs 2,400 crore as on March 31, 2022 and low utilisation of the fund-based bank limit, (24% on average during the 12 months through March 2022). The company has nil term debt and liquidity available in the form of unutilised limit and surplus cash will be sufficient to cover debt obligation and meet incremental working capital requirement.

 

Environment, social and governance (ESG) profile

The ESG profile of BHEL supports its strong credit risk profile.

 

The thermal power sector has a significant impact on environment owing to emission of Green House Gas and high water consumption. Also, the sector has significant social impact because of its direct bearing on the health and wellbeing of its workers and customers.

 

Key ESG highlights

• As an established EPC player in the solar energy market of India with a portfolio of 1.2 GW, BHEL is poised to contribute actively in achieving the national targets of 100 GW by 2022 and 280 GW by 2030.
• The company has discontinued use of refrigerants having ozone depleting substances. The new machines procured at various units are using refrigerant gas such as R-134a and R-410a, which have zero ozone depletion potential.
• In terms of water recycling, 99% of the water used in fiscal 2021 was recycled.
• Equal opportunity to employer at the time of recruitment and special provisions to safeguard women employees. Female employee has 5.9% representation in total workforce, which is lower than peer average.
• Its governance structure is characterised by 47% of its board comprising independent directors. However, there is no split in the chairman and CEO positions. 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 its high share of market borrowing in its overall debt and access to both domestic and foreign capital market.

Outlook: Negative

CRISIL Ratings believes BHEL's profitability may remain constrained by the increased input cost pressure along with continued high working capital requirement which may weaken financial risk profile.

Rating Sensitivity Factors

Upward factors

• Sustained improvement in operating revenue, with operating profit (pre-provision) above 6%, on the back of higher-than-expected order execution along with efficient raw material consumption and cost control.
• Sustained net cash of over Rs 3,000 crore, driven by higher accrual from operations or reduced working capital intensity.

 

Downward factors

• Weakening of business risk profile through low order intake or delay in execution of orders, resulting in reduced scale of business
• Continued operating losses at pre provision levels in fiscal 2023 and lack of visibility of achieving more than 4% pre provision operating margins thereafter.
• Weakening of the financial flexibility due to reduction in net cash position to below Rs 1000 crore, either because of lower-than-expected cash accrual, high dividend payout, or increased working capital intensity.

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. Government of India holds 63.17% of equity in BHEL.

 

BHEL has operations in the power and industry segments. The power group 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 group 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, three active JVs, and operates in more than 150 project sites. It has a widespread overseas footprint with references in 83 countries.

Key Financial Indicators (CRISIL Ratings-adjusted numbers)

As on/for the period ended March 31	Unit	2022#	2021
Operating income	Rs.Crore	21211	17097
Profit After Tax (PAT)	Rs.Crore	445	(2706)
PAT Margin	%	2.1	-15.8
Adjusted debt/adjusted networth	Times	0.18	0.19
Interest coverage	Times	3.20	-11.25

#based on abridged financials reported,

Any other information: Not applicable