IDFC Securities - Bharat Heavy Electricals Limited (BHEL) BHELs Q2FY19 results (Neutral) - Receivables rise due to adverse payment terms

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IDFC Securities

Shirish Rane

BHEL's Q2FY19 results (Neutral) - Receivables rise due to adverse payment terms

Q2FY19 result highlights

BHEL reported weak set of Q2FY19 numbers due to lower margins. While reported PAT grew 60.4%yoy to Rs1.85bn (est: Rs1.8bn), it included reversal of depreciation of Rs1.1bn (pre-tax) on account of change in useful life of assets. Adjusted PBT at Rs.1.6bn was below our estimate of Rs2.8bn.
Revenue grew 7.7%yoy to Rs67.8bn (est: Rs68bn) led by strong growth in revenue from industrial segment (up 31.7%yoy). Power segment revenues grew by only 1.7%yoy. EBITDA came in at Rs2.4bn (loss of Rs954m in PY) and was below estimate of Rs3.5bn. Gross margins grew 70bp yoy to 41.4%, but were lower 190bp qoq (est: 41.9%). Reported EBITDA includes favourable impact of fx MTM gain of Rs2.7bn (gain of Rs1.9bn in Q2FY18).
Cash position declined from Rs113bn as on Mar-18 to Rs71bn Sep-18, on account of increased debtors and inventory levels. Debtors rose from Rs355bn in Mar-18 to Rs390bn in Sep-18 due to deferred payment terms in newer contracts and rise in share of revenue from state PSUs (vis-à-vis Central PSUs), wherein payment cycles are longer. State PSUs currently account for 53% of the total revenue.
BHEL announced buyback of 189.3m equity shares (5.16% of share capital) at Rs86/share (19% premium to CMP) amounting to cash outflow of Rs16.3bn. The record date is November 06, 2018.
Order inflow at Rs51.6bn was above our estimate of Rs18bn and order backlog as on Sep 2018 stands at Rs1.2trn (3.9x TTM sales). For H1FY19, the order inflow stood at Rs95.3bn. Furthermore, BHEL has strong L1 order position worth Rs250bn.

Key positives: Robust order inflows and strong L1 position

Key negatives: Rise in debtors and inventory levels; lower than expected gross margins

Impact on financials: Upgrade of 16.2% in FY19E EPS due to lower depreciation levels post change in useful life of plant and machinery. No material change in FY20E EPS.

Valuations & view

BHEL’s strong order backlog and improved share of executable orders has enhanced revenue and earnings visibility for FY20. BHEL’s market share gains and diversification efforts have led to steady order wins for the company. While we expect 10%/30% revenue/earnings CAGR for BHEL over FY18-20, valuations at 24.7x/18.6x FY19E/FY20E factor potential upsides and do not offer margin of safety against delay in execution which would pose a material risk to our earnings estimate for FY19/20. As a result, we maintain our Neutral rating on the stock with a revised target price of Rs78 (20x FY20E earnings).

29/10/2018 6 EN

Underlying

Bharat Heavy Electricals Limited

Bharat Heavy Electricals is an integrated power plant equipment manufacturer in India engaged in the design, engineering, manufacture, construction, testing, commissioning and servicing of a wide range of products and services for the core sectors of the economy, viz. Power, Transmission, Industry, Transportation (Railway), Renewable Energy, Oil & Gas and Defense with over 180 products offerings to meet the needs of these sectors. Co. operates through Power and Industry segments.

See profile

INE257A01026 National Stock Exchange of India India

Provider

IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

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Analysts

Shirish Rane

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