Detailed Rationale

CRISIL Ratings has downgraded its rating on the long-term bank facilities of Bharat Heavy Electricals Limited (BHEL) to ‘CRISIL AA-/Negative’ from ‘CRISIL AA/Negative’, and has reaffirmed the ‘CRISIL A1+’ rating on the short-term facilities.

 

The rating downgrade reflects weakening of the business and financial risk profile of BHEL, owing to significantly weaker-than-expected operating performance in fiscal 2021, and operating losses reported for the second consecutive year. The ‘Negative’ outlook factors in the likelihood that profitability may remain under pressure in fiscal 2022, amidst the ongoing pandemic, further weakening the credit risk profile.

 

Operating income declined 19% year-on-year to Rs 17,308 crore in fiscal 2021, and operating loss (defined as loss before interest, tax, depreciation and amortisation) stood at Rs 3,135 crore. Performance was severely impacted by the muted order inflow and slower execution during the year owing to the pandemic, resulting in pre-provisioning operating loss of Rs 1,668 crore. Losses aggravated especially in the fourth quarter, as BHEL created one-time provisioning of around Rs 1,800 crore to improve the quality of its assets; most of it accounted during the quarter.

 

During fiscal 2021, receivables (including contract assets) declined 12% y-o-y to Rs 31,292 crore, contributing to improvement in net cash to Rs 1,868 crore (Rs 1,485 crore in fiscal 2020), despite high operating loss. However, working capital intensity was high due to lower revenue base during fiscal 2021. Furthermore, timely payments to micro, small and medium enterprises (as seen in lower payables as on March 31, 2021) limit flexibility to fund working capital by stretching payables. The management’s focus on improving collections along with various cost rationalisation measures, could support cash balance to some extent.

 

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 next 12-24 months, and would thus be a key monitorable.

 

BHEL’s market position in the power generation and electrical equipment segment remains strong. However, order inflow continued to remain muted during fiscal 2021 and declined 43% y-o-y to Rs 13,472 crore. Size of the order book remained healthy, despite declining to Rs 102,090 as of March 2021 (from Rs 1,08,400 crore as of March 2020), with around 80% of it being executable. CRISIL Ratings believes that macro challenges in the power sector and slower capacity additions by central and state public sector unit (PSUs) may further weaken revenue prospects. BHEL is taking measures to diversify the order book and the same is expected to be supported by improved prospects in diverse businesses such as transportation, defence, and emission control.

 

The ratings continue to reflect BHEL’s leading market position 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), sizeable working capital requirement and exposure to intense competition.

Analytical Approach

For arriving at the ratings, 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 declined 43% y-o-y to Rs 13,472 crore in fiscal 2021. Nevertheless, a healthy order book and market position provide strong revenue visibility for the medium term. Some of the large orders received were for supply and installation of flue gas desulphurization (FGD) systems in Tamil Nadu and hydroelectric-mechanical (E&M) works in Telangana and Andhra Pradesh. The company is also likely to tap replacement demand and aim for orders from the transportation, emission control, transmission and rural electrification sectors. Order inflow and profitability remain key monitorables.

 

• Strong, but moderating, debt protection metrics: The debt protection metrics such as interest cover and net cash accrual to total debt has weakened significantly in fiscal 2021, owing to high operating loss. However, the balance sheet still remains healthy, backed by strong networth and nil term debt. Liquidity, supported by the available cash balance and unutilised bank limit, is sufficient to fund working capital and capex 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 susceptible 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.

 

• Sizeable working capital requirement: Though receivables in value terms have declined in fiscal 2021, 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 PSUs. However, the company continues to have substantial exposure of around 23% (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 (TSGENCO) as on March 31, 2021. 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 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 strong driven by net cash and cash equivalent of Rs 1,868 crore as on March 31, 2021, and low utilisation of fund-based bank limit, at 15% on average in the 12 months through March 2021. The company has nil term debt and the liquidity available in form of unutilised limits and surplus cash will be sufficient to cover the debt obligation and meet incremental working capital requirement.

Outlook: Negative

CRISIL Ratings believes BHEL's profitability may remain under pressure in fiscal 2022, amidst the ongoing pandemic, and this may further weaken the credit risk profile.

Rating Sensitivity factors

Upward factors

•     Sustained improvement in operating revenue, with operating profit 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 and continued operating losses.

•    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 presence 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	2021#	2020
Operating Income	Rs Crore	17,308	21,459
Profit After Tax (PAT)	Rs Crore	(2,717)	(1,473)
PAT Margin	%	(15.7)	(6.9)
Adjusted debt/adjusted networth	Times	0.19	0.17
Interest coverage	Times	NM	0.69

#based on abridged financials reported, NM – Not meaningful

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	6000	NA	CRISIL AA-/Negative
NA	Letter of credit & Bank Guarantee	NA	NA	NA	54000	NA	CRISIL A1+

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Raichur Power Corporation Ltd	Moderate	Business and financial linkages