| Bharat Heavy Electricals Ltd’s (BHEL’s) stock price has fallen by almost a fifth since January. Weak revenue growth, high receivables (customer dues) and low customer advances have taken the sparkle off this state-owned Maharatna. At the current market price, its price-earnings multiple has tumbled to around 14 times estimated FY19 earnings, from 20 times until a few months ago. Strangely, even the 74% spike in its FY18 order flows failed to enthuse the Street, due to concerns on sustainability. The question is—does the cheap valuation, which is lower than a decadal average, build a case for investors to buy into BHEL? Sentiments on the Street are mixed. Some industry experts believe that new areas such as environmental compliance and refurbishing old power plants can generate order flows for the company in the years ahead. This could keep the annual run rate at a healthy 40,000-50,000 crore. BHEL’s diversification into other areas such as railways will shore up revenue prospects too. A Nomura report dated 19 June that has upgraded the stock to “Neutral” from “Reduce”, says “executable order back log (book) has jumped 50% in FY2018, though the overall order back log may be up only 12.3%. This can drive revenue by 18.6% compounded annual growth rate between FY2018 and FY2020 compared to a decline that was forecast earlier”. Also, recent orders have been procured at higher margins. Hence, some brokerage firms supportive of BHEL’s prospects are forecasting an Ebitda (earnings before interest, tax, depreciation and amortization) margin increase over the next two years. That said, there are risks from the power sector that is the company’s mainstay. The poor financial health of distribution companies and low utilization levels at power plants are risks to order flows. The industrial sector and new diversifications may not add significantly to profits in the near term. That apart, BHEL’s fortunes continue to be dragged down by fundamental weakness. Trade receivables are at an abominable 81% of net sales (FY18). It has been high for about four years. The scenario is unlikely to change soon given that some of its customers are also financially in the doldrums. This is one of the key reasons why BHEL’s market capitalization has steadily eroded. The cash balance and trade receivables together are about 1.7 times its market value. Another concern is the rise in employee cost due to salary revisions that may weigh on profitability. This is in addition to the fact that orders may come in at low margins due to stiff competition. To sum up, the troubles are far from over for the company, although the stock’s low valuations may reduce the risk for the equity investor in BHEL. | 
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