Rating Rationale
November 05, 2018 | Mumbai
Bharat Heavy Electricals Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.60000 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed the rating on the bank facilities of Bharat Heavy Electricals Limited (BHEL) at 'CRISIL AA+/Stable/CRISIL A1+'.

The ratings of BHEL are unaffected by the buyback of Rs. 1628 crores announced on October 25, 2018. In 6 month period ended September 2018, the cash position has reduced to Rs 7,099 crores from Rs 11,287 crores as of March 2018 mainly on account of increased working capital intensity. BHEL had received substantial order inflow of Rs 40,932 crores in fiscal 2018. Consequently, with increased execution the inventory has increased by around Rs 1500 crores. Also, the debtors have increased by more than Rs 3000 crores as debtor-mix has changed with 53% contribution from State electricity boards (compared to 39% as of March 2018). The performance is expected to pick up from second half of fiscal 2019 with higher realization of debtors and customer advances leading to sustaining of cash and bank balance over the near term.

The ratings continue to reflect BHEL's leading position in the power generation and electrical equipment markets, healthy order inflows and outstanding order book and strong financial risk profile. These strengths are partially offset by structural issues in the sector which contributes over 80% to revenues, sizeable working capital requirements due to substantial receivables and exposure to intense competition.

CRISIL had, on August 30, 2018, revised its rating outlook on the long-term bank facilities of BHEL to 'Stable' from 'Negative', and reaffirmed the long term rating at 'CRISIL AA+'; the short-term rating has been reaffirmed at 'CRISIL A1+'.

Analytical Approach

For arriving at the ratings, CRISIL has consolidated its Joint venture Raichur Power Corporation Ltd (RPCL) on a moderate consolidation basis and has not consolidated any other subsidiary or joint venture. This is because BHEL enters into JV with state governments to obtain the EPC contract of power project on nomination basis. Management has indicated that they do not extend financial support to these JVs and also have a clause for potential exit once the projects are completed. For RPCL, further equity infusion may be required to support the project.  CRISIL has considered net provisions for arriving at the operating profit before depreciation, interest and taxes.

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 markets which accounts for more than 54 % of the country's installed capacity. Cost competitiveness and superior execution capabilities support its dominant market presence and it is well poised to benefit from structural recovery in the power sector. However, given the ongoing challenges in operating environment, timely execution of orders will be critical over the medium term.

* Healthy order inflows and outstanding order book: A healthy order book (Rs.1,17,000 crores as of June 2018 with ~85% of the orders being executable) and market position provide strong revenue visibility for the medium term. Order inflow has increased during fiscal 2018 to Rs 40,932 crores driven by receipt of various large projects such as 3x800 MW Patratu Supercritical Thermal Power Plant (STPP), 2x660 MW Udangudi STPP, 1x660 MW Panki STPP, 1x660 MW Bhusawal STPP etc. BHEL also aims to get business through replacement demand, transportation sector, emission control, transmission and rural electrification amongst others.

* Strong financial risk profile: Financial risk profile is comfortable, backed by strong net worth, minimal debt and robust liquidity. Financial flexibility also benefits from status as a 'Maharatna' public sector undertaking. Liquidity is sufficient to fund working capital and capex requirements in the near-to-medium term, supported by the cash pile and unutilised bank line. Return on capital employed has improved over the past couple of years, with improved operating performance.

Weaknesses
* Business skewed towards the power sector exposing it to the structural issues in the sector: Power segment has traditionally contributed 70% - 80% to the revenue of BHEL and BHEL's profitability is susceptible to structural issues and volatility in the power segment, including excess capacity leading to limited expected capacity additions, delays in land acquisition, obtaining environmental clearances, ensuring fuel availability, and funding challenges. Over the past several years, the structural issues resulted in a slowdown in BHEL's project execution for some of the projects. However, it has improved with clearance to various major projects but the operating profitability is expected to remain constrained at similar levels. Although, BHEL has been focusing on diversifying its revenue profile by expanding into segments such as transportation, transmission, renewable, emission control and defence over the past few years, however, the power sector is still expected to remain the key revenue driver in the medium term.

* Sizeable working capital requirements due to substantial receivables: Company has sizeable receivables increasing the working capital intensity but is supported by increased customer advances. Moreover, the risk of doubtful debtors is offset by BHEL's provisions policy and reduction in the percentage of private players in the total receivables. Nevertheless, ability to reduce debtor days over the medium term will constitute a key rating sensitivity factor.

* Exposure to intense competition: BHEL operates in an increasingly competitive market scenario as several domestic companies entered the BTG space through strategic JVs with international players increasing the industry capacity to over 30 GW with limited expected power plant capacity additions planned over the medium term. BHEL has remained competitive by its significant presence in the super critical technology based thermal power business through collaborative approach, capability enhancement and accelerated project delivery. Few large orders in the last 24 months has seen aggressive bidding. Competition among supercritical equipment manufacturers will keep the pricing and profitability sensitive.
Outlook: Stable

CRISIL believes BHEL's profitability will sustain over medium term with improvement in the operational performance by higher execution of orders, and working capital requirements will be funded largely advances from the customers and recovery efforts by the company.

Upward Scenario
* Structural revival in the power sector translating into higher order inflows, higher project execution and easing of competitive intensity coupled with reduction in working capital intensity.

Downgrade Scenario
* Lower order inflows or delay in the execution of orders leading to losses or stretch in working capital position leading to deterioration of cash.

About the Company

BHEL is an integrated power plant equipment manufacturer. The 'Maharatna' central public sector enterprise is one of the largest engineering and manufacturing companies in India. Government holds 63.06% 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 offers erection services for all types of power plants  such as gas based, coal based, hydro, nuclear, solar power etc. The industry group caters to diverse sectors such as process industries, transportation, power transmission and distribution, and defense. BHEL designs, engineers, manufactures, constructs, tests, commissions, and services a wide range of products. It has 17 manufacturing units, three active joint ventures; and current project execution at more than 150 project sites. It has a widespread overseas footprint with references in 83 countries.

For the first half of fiscal 2019, BHEL's profit after tax and turnover increased to Rs. 341 Crores and Rs. 12,715 crores, respectively from profit after tax and turnover of Rs. 196 crores and Rs. 12,185 crores during the corresponding period last year.

Key Financial Indicators (CRISIL Adjusted Numbers)
As on/for the period ended March 31 Unit 2018 2017
Revenue Rs. Crores 28,825 28,492
Profit After Tax (PAT) Rs. Crores 807 496
PAT Margin % 2.8 1.7
Adjusted debt/adjusted networth Times 0.00 0.00
Interest coverage Times 8.14 5.3

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue size (Rs.Cr) Rating Assigned with Outlook
NA Cash Credit NA NA NA 3,750.00 CRISIL AA+/Stable
NA Letter of credit & Bank Guarantee NA NA NA 53510.00 CRISIL A1+
NA Proposed Cash Credit Limit NA NA NA 1250.00 CRISIL AA+/Stable
NA Proposed Letter of credit & Bank Guarantee NA NA NA 1490.00 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  5000.00  CRISIL AA+/Stable  30-08-18  CRISIL AA+/Stable  12-05-17  CRISIL AA+/Negative  25-04-16  CRISIL AA+/Negative  21-09-15  CRISIL AAA/Negative  CRISIL AAA/Stable 
            24-03-17  CRISIL AA+/Negative  09-03-16  CRISIL AA+/Negative  22-04-15  CRISIL AAA/Stable   
                    23-01-15  CRISIL AAA/Stable   
Non Fund-based Bank Facilities  LT/ST  55000.00  CRISIL A1+  30-08-18  CRISIL A1+  12-05-17  CRISIL A1+  25-04-16  CRISIL A1+  21-09-15  CRISIL A1+  CRISIL A1+ 
            24-03-17  CRISIL A1+  09-03-16  CRISIL A1+  22-04-15  CRISIL A1+   
                    23-01-15  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 3750 CRISIL AA+/Stable Cash Credit 3750 CRISIL AA+/Stable
Letter of credit & Bank Guarantee 53510 CRISIL A1+ Letter of credit & Bank Guarantee 53510 CRISIL A1+
Proposed Cash Credit Limit 1250 CRISIL AA+/Stable Proposed Cash Credit Limit 1250 CRISIL AA+/Stable
Proposed Letter of Credit & Bank Guarantee 1490 CRISIL A1+ Proposed Letter of Credit & Bank Guarantee 1490 CRISIL A1+
Total 60000 -- Total 60000 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Engineering Sector
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support

For further information contact:
Media Relations
Analytical Contacts
Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

Sachin Gupta
Senior Director - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 3023
Sachin.Gupta@crisil.com


Nitesh Jain
Director - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 3329
nitesh.jain@crisil.com


Kshitij Jain
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 4051
Kshitij.Jain@crisil.com
Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com


 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 


Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.


CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.


DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL