Rating Rationale
November 21, 2019 | Mumbai
Bharat Heavy Electricals Limited
Long-term rating downgraded to 'CRISIL AA/Stable'; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.60000 Crore
Long Term Rating CRISIL AA/Stable (Downgraded from 'CRISIL AA+/Negative')
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its rating on the long term bank facilities of Bharat Heavy Electricals Limited (BHEL) to 'CRISIL AA/Stable' from 'CRISIL AA+/Negative'. The rating on the short term bank facilities have been reaffirmed at 'CRISIL A1+'.
 
The revision in rating reflects BHEL's weaker than expected operating performance and the continued decline in net cash levels of the company during the first half fiscal of 2020. BHEL's revenues declined to Rs 10,757 crore during the first half of fiscal 2020, as against Rs 12,715 crores during the corresponding period of the previous year, driven by slower execution of orders. Lower revenues and high cost structure led to decline in operating profit before interest, tax, depreciation and amortization (OPBIDT) to nil during first half of fiscal 2020 (as against OPBDIT of Rs 528 crore during the corresponding period of the previous year). Operating profitability is likely to remain subdued due to highly competitive bidding over the past few years. Further, overcapacity in the sector may lead to additional pricing pressure in upcoming bids.
 
Debtors remained high at Rs 37,609 crore as on September 30, 2019 (Rs 35,493 crore as on March 31, 2018). Higher working capital intensity along with non-recurring nature of payment such as equity buyback and payment of wages revision arrears has led to depletion of gross cash reserves to Rs 6,816 crore as on September 30, 2019 (Rs 11,409 crore as on March 31, 2018). Further, net cash position (gross cash and cash equivalent less gross borrowings) had declined from ~Rs 11,000 crore as on March 31, 2018 to ~Rs 5,100 crore as on March 31, 2019. This has further declined to ~Rs 2,000 crore as on September 30, 2019. BHEL's short term borrowing has increased to Rs 4,793 crore as on September 30, 2019 (vis-a-vis negligible borrowing as on March 31, 2018). Management's focus on improving collection cycle is expected to increase the net cash levels to around Rs 5,000 crore by the end of fiscal 2020. Further, working capital intensity and liquidity position will be key monitorables.
 
However, BHEL's market position in the power generation and electrical equipment segment continues to remain strong. BHEL has a healthy order book of Rs 1,08,603 crore as of September 2019, out of which around 80% is executable. This is supported by favourably placed bid position in orders worth Rs 21,000 crore. CRISIL expects addition in thermal power capacity by the central and state public sector unit (PSUs) over the next 5 years is expected to sustain the order book considering the strong market position of BHEL in the power BTG segment. Order book is additionally supported by improved order prospects in the diversified business areas such as transportation, defense and emission control.
 
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.

Analytical Approach

For arriving at the ratings, CRISIL has consolidated its Joint venture (JV) Raichur Power Corporation Ltd (RPCL) on a moderate consolidation basis and has not consolidated any other subsidiary or JV. This is because BHEL enters into JV with state governments to obtain the engineering procurement construction (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.

Please refer Annexure - Details of Consolidation, 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 markets, which accounts for 53% of the country's installed capacity of conventional power projects. 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 the 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.1,08,603 crores as of September 2019 with ~80% of the orders being executable) and market position provide strong revenue visibility for the medium term. Order inflow during the first half of fiscal 2020 was Rs. 11,296 crore primarily driven by the power segment orders. Some of the large orders received were for supply and installation of Flue Gas Desulphurization (FGD) system in Chhattisgarh and Telangana. BHEL also aims to get business through replacement demand, transportation sector, emission control, transmission and rural electrification amongst others. CRISIL believes that order inflows and profitability trends will be key monitorables.
 
* Strong financial risk profile: Financial risk profile is comfortable, backed by strong net worth, minimal debt and strong 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 balances and unutilised bank lines.
 
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 the 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, 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. Moreover, the risk of doubtful debtors is offset by BHEL's provisions policy and reduction in the percentage of private players. 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.
Liquidity Strong

Liquidity is strong driven by net cash and cash equivalents of Rs 2,024 crore as on September 30,  2019 and low average fund based bank limit utilization of ~ 16% in the last 12 months through October 2019. Company has low long term debt and the expected cash accruals during fiscal 2020 will be sufficient in servicing the debt obligations and meeting the incremental working capital requirements.

Outlook: Stable

CRISIL believes BHEL's credit profile will benefit from its strong market position. However, working capital intensity will continue to remain high over the medium term on account of high debtor days.
 
Rating Sensitivity factors
Upward factors
* Sustained level of net cash position to over Rs 5,000 crore, driven by higher accruals from operations or through reduced working capital intensity
* Improvement in the operating profitability through higher than expected order execution and efficient raw material consumption and cost control
 
Downgrade factors
* Sustainable decline in net cash levels below Rs 1,000 crore, driven by weaker profitability or high working capital intensity
* Weakening of business risk profile through lower order inflows or delay in execution of orders

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 63.17% 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 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 16 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 2020, BHEL reported a loss before tax of Rs. 179 crore from revenue from operations of Rs. 10,757 crore as compared to profit before tax of Rs. 497 crore on the revenue from operations of Rs. 12,715 crore during the corresponding period last year.

Key Financial Indicators
As on/for the period ended March 31 Unit 2019 2018
Operating Income Rs. Crores 30,204 28,857
Profit After Tax (PAT) Rs. Crores 1,215 807
PAT Margin % 4.0 2.8
Adjusted debt/adjusted networth Times 0.08 0.00
Interest coverage Times 7.25 8.14
 

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 crore) Rating Assigned with Outlook
NA Cash Credit NA NA NA 2,778.00 CRISIL AA/Stable
NA Letter of credit & Bank Guarantee NA NA NA 52,620.00 CRISIL A1+ 
NA Proposed Cash Credit Limit NA NA NA 3,222.00 CRISIL AA/Stable
NA Proposed Letter of credit & Bank Guarantee NA NA NA 1,380.00 CRISIL A1+ 
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation
Raichur Power Corporation Ltd (RPCL) Moderate
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  6000.00  CRISIL AA/Stable  22-08-19  CRISIL AA+/Negative  05-11-18  CRISIL AA+/Stable  12-05-17  CRISIL AA+/Negative  25-04-16  CRISIL AA+/Negative  CRISIL AAA/Negative 
            30-08-18  CRISIL AA+/Stable  24-03-17  CRISIL AA+/Negative  09-03-16  CRISIL AA+/Negative   
Non Fund-based Bank Facilities  LT/ST  54000.00  CRISIL A1+  22-08-19  CRISIL A1+  05-11-18  CRISIL A1+  12-05-17  CRISIL A1+  25-04-16  CRISIL A1+  CRISIL A1+ 
            30-08-18  CRISIL A1+  24-03-17  CRISIL A1+  09-03-16  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 2778 CRISIL AA/Stable Cash Credit 2778 CRISIL AA+/Negative
Letter of credit & Bank Guarantee 52620 CRISIL A1+ Letter of credit & Bank Guarantee 52620 CRISIL A1+
Proposed Cash Credit Limit 3222 CRISIL AA/Stable Proposed Cash Credit Limit 3222 CRISIL AA+/Negative
Proposed Letter of Credit & Bank Guarantee 1380 CRISIL A1+ Proposed Letter of Credit & Bank Guarantee 1380 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


Gopikishan Dongra
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 8471
Gopikishan.Dongra@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.CRISIL or its associates may have other commercial transactions with the company/entity.

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