By Ashish Agrawal

India Ratings and Research (Ind-Ra) has downgraded Bharat Heavy Electricals Limited’s (BHEL) Long-Term Issuer Rating to ‘IND AA-’ from ‘IND AA’. The Outlook is Negative. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Fund-based working capital limits

-

-

-

INR60

IND AA-/Negative /IND A1+

Long-term rating downgraded, short-term rating affirmed

Non-fund based working capital limits

-

-

-

INR540

IND AA-/Negative /IND A1+

Long-term rating downgraded, short-term rating affirmed

Commercial paper *# (CP)

-

-

Up to 365 days

INR80

IND A1+

Affirmed

*The CP proceeds will be used for meeting working capital requirements
#INR30 billion carved out of fund-based limits

 

Ind-Ra continues to assess the standalone profile of BHEL and incorporate the benefits accrued to it due to the government of India’s (GoI) ownership to arrive at the ratings.

The downgrade reflects BHEL’s continued weaker-than-Ind-Ra-expected operating performance in FY21 due to COVID-19 led delays in the execution of orders, coupled with weak ordering environment in the power sector, which is likely to linger through the 1HFY22. The company’s order inflow reduced to multi-year low of INR135 billion during FY21 after remaining close to INR250 billion over FY19-FY20.

The Negative Outlook factors in Ind-Ra’s expectation of a further deterioration in BHEL’s FY22 performance owing to:

i) subdued order inflow on account of excess capacity in the sector

ii) persistently long working capital cycle

iii) limited diversification progress, and

iv) the likelihood of a further deterioration in its balance sheet strength.

BHEL has been working on various cost-cutting and quality-improving measures, along with focussing on cash collections. However, the envisaged diversification initiatives are still under progress and are yet to deliver meaningful results; the industrial segment’s average margins remain lower than that of the power segment. However, BHEL’s market position in the power segment remains strong with its large order book and strong financial position.

KEY RATING DRIVERS

Order Inflows at Multi-year Low; to Remain Subdued: BHEL's order inflows continued to decline in FY21 and remained at the lower-end of Ind-Ra’s expectation owing to an unfavourable market scenario. Accordingly, its order book shrunk 5.8% yoy to INR1,021 billion in FY21. Although BHEL is the lowest bidder in the offers for tenders (totalling over INR150 billion), any delay in the awarding of these tenders can result in lower inflows, thus exerting pressure on the typical 24-48 months’ execution cycle.

However, the management expects order inflows from the industrial, solar, railways and flue gas desulphurisation segments to help BHEL achieve healthy order inflows. Ind-Ra expects the company to have subdued order inflows during FY22 (FY21: INR135 billion; FY20: INR236 billion) and will monitor the same. Order inflows below INR250 billion beyond FY22 could result in a negative rating action.

The company’s book-to-bill ratio increased to 6x in FY21 (FY20: 5.0x; FY19: 3.6x) owing to the slower order execution resulting in lower revenues. Additionally, BHEL’s order book is concentrated with two customers, accounting over 25% of the order book.

Continued Decline in Operating Performance: The COVID-19 led lockdown and domestic and global supply-chain disruptions impacted the company’s resource mobilisation and order execution in FY21. The company’s revenue declined 19% yoy to INR173 billion in FY21, leading to an EBITDA loss of INR31.4 billion (FY20: loss of INR2.3 billion). Given the large fixed-cost nature of the business with employee costs of INR54 billion annually, the significant moderation in revenue resulted in the EBITDA losses. Resultantly, BHEL’s EBITDA margin remained negative at 18.1% in FY21 (FY20: negative 1.1%; FY19: 7%) while the gross margin contracted to around 33% (36%; 40%).

The company’s EBITDA was also impacted due to a significant increase in net provisions to INR14.7 billion during FY21 (FY20: INR2.3 billion). BHEL has been taking several initiatives to rationalise overheads. This has aided in keeping the cost per employee under control, despite wage revisions and inflation, thus limiting the losses owing to the delays in the order execution. Ind-Ra expects the company’s EBITDA margin to remain subdued, but recover in FY22 led by an improved order execution aided by a better operating environment. 

Government Ownership: The ratings continue to factor in the financial flexibility enjoyed by BHEL on account of the GoI’s ownership in the company (63.17% at FYE21) and the company’s strategic importance in India's power and allied sector, given its market leadership in the thermal power equipment space. BHEL also has two GoI-nominated directors on its board and has been granted a Maharatna status.

Liquidity Indicator - Adequate: BHEL’s cash and cash equivalents remained high at INR67 billion at FYE21 (FYE20: INR64 billion; FYE19: INR75 billion). Moreover, its net cash position improved to INR18.7 billion in FY21 (FY20: INR14.9 billion) led by 12% yoy reduction in receivables and contract assets to INR312.9 billion. Additionally, BHEL’s liquidity is supported by its fund-based limits totalling INR60 billion (average utilisation of 15% for the 12 months ended March 2021). BHEL’s cash flow from operations turned positive to INR7.5 billion in FY21 (FY20: negative INR26 billion; FY19: negative INR34 billion) owing to a reduction in receivables and contract assets. However, the overall working capital cycle remained elongated, leading to borrowings of INR49 billion in FY21 (FY20: INR51 billion; FY19: INR26 billion).

The company did not have any term debt borrowings at FYE21. BHEL’s gross interest coverage (operating EBITDA/gross interest expense) remained negative at 8.4x in FY21 (FY20: negative 0.5x; FY19: 7.4x) owing to the negative EBITDA. A further lower-than-Ind-Ra-expected revenue and continued high working capital requirements in FY22 could result in negative operating cash flows and free cash flows post dividends and capex, thus resulting in a further increase in borrowings.

CP Programme Liquidity Backup: Ind-Ra typically expects investment-grade CP issuers to have full liquidity back up available for the outstanding CP as per Ind-Ra’s Short-Term Ratings Criteria for Non-Financial Corporates. Hence, in case of issuers rated ‘IND AA-’ or below, the agency usually requires the CP to be carved out of the entity’s fund-based working capital limits, given the increased refinancing frequency in CPs. A variation from the rating criteria has been made in the case of BHEL, given Ind-Ra’s assessment that the company has strong funding flexibility and refinancing ability. Also, BHEL’s management has indicated that it intends to maintain unutilised working capital loans/cash balances available above the CP programme limit to ensure backup. The company has maintained a track record of the same in the 12 months ended May 2021.

Elongated Working Capital Cycle: Ind-Ra believes BHEL’s working capital cycle will continue to be elevated despite the reduction in receivables to INR313 billion in FY21 (FY20: INR354 billion; FY19: INR386 billion) on account of the absence of mobilisation advances from certain projects. The reduction in receivables was supported by increased cash collection efficiency of the entity, coupled with additional provision made for doubtful debtors. At FYE21, BHEL's debtor provisions increased to INR175 billion (FYE20: INR165 billion; FYE19: INR152 billion) due to additional merit-based one-time provisioning of around INR18 billion done in FY21.

During FY21, the net working capital cycle improved but remained elongated at about INR224 billion (FY20: INR281 billion; FY19: INR268 billion) supported by the reduction in receivables, additional provisions and a reduction in inventory to INR72 billion (INR89 billion; INR78 billion). The trade payables/advances from customers and contractors contracted during FY21 as the company continued to pay its vendors despite the slowness in execution.

Ind-Ra believes the continued elongated working capital cycle will result in BHEL seeing either a drawdown on its cash balances or a rise in its additional borrowings, or both, depending on the interest cost arbitrage. During FY21, BHEL has been using CP and bank borrowings to fund the working capital, as it continues to earn a positive carry rather than using cash.


RATING SENSITIVITIES

Outlook Revision to Stable: A significant improvement in the industry outlook, leading to increased order inflow, along with a significant improvement in the revenue, operating margin, and working capital cycle, while maintaining the credit metrics, all on a sustained basis, could result in the Outlook revision to Stable.

Negative: Continued decline in the order inflows, leading to a fall in the revenue and a further delay in the EBITDA margin turning positive to around 5% post FY22, and/or increase in the working capital cycle, and/or unexpected debt-led investment, leading to deterioration in the credit metrics, all on a sustained basis, could lead to a negative rating action.


COMPANY PROFILE

BHEL is engaged in the design, engineering, manufacture, construction and testing of a wide range of products and services for power plants, transmission systems, transportation works, renewable energy units, oil and gas facilities, and defence services. It has 16 manufacturing facilities and two repair units. Its total manufacturing capacity is 20,000MW.

 FINANCIAL SUMMARY 

Particulars (INR billion)

FY21

FY20

Revenue

173.1

214.6

EBITDA

-31.4

-2.3

EBITDA margin (%)

-18.1

-1.1

Gross interest coverage (x)

-8.4

-0.5

Profit after tax

-27.2

-14.7

Source: BHEL, Ind-Ra
Figures provided are Ind-Ra-adjusted

 

 

 


RATING HISTORY

 

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

6 July 2020

21 August 2019

4 July 2019

14 February 2019

29 November 2018

Issuer rating

Long-term

-

IND AA-/Negative

IND AA/Negative

IND

AA+/Negative

IND

AA+/Stable

IND

AA+/Stable

IND AA+/Stable

Fund-based working capital limits

Long-term/Short-term

INR60

IND AA-/Negative/IND A1+

IND AA/Negative/IND A1+

IND AA+/Negative/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

Non-fund-based working capital limits

Long-term/Short-term

INR540

IND AA-/Negative/IND A1+

IND AA/Negative/IND A1+

IND AA+/Negative/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

CP

Short-term

INR80

IND A1+

IND A1+

IND A1+

IND A1+

IND A1+

-

 

 

 


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Fund-based working capital limits

Low

Non-fund-based working capital limits

Low

CP

Low

 

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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Analyst Names

  • Primary Analyst

    Ashish Agrawal

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687241

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121