BHEL's Q2FY20 results (Neutral) - No respite; Consecutive weak quarter

Q2FY20 result highlights

• BHEL reported a decline of 8% yoy in revenues to Rs62bn (est: Rs71bn). The revenue miss was led by slower execution to minimise working capital requirements.
• Miss in revenues has led to BHEL reporting an EBITDA of Rs2.7bn (vs est of Rs3.7bn; EBITDA of Rs2.4bn in Q2FY19). As a result, the company reported profit of Rs1.2bn (vs our estimate of profit of Rs2.1bn)
• Order inflow came in at Rs74bn/112bn in Q2Y20/H1FY20. As a result, order backlog marginally declined from Rs1.09trn at end of FY19 to Rs1.08tn (3.8x Book to Bill ratio) at end of Sep 2019.
• BHEL is favourably placed in orders worth Rs210bn of large BTG orders & a host of FGD tenders. BHEL expects further tender pipeline of 8-10GW of power orders across coal, hydro and nuclear power plants over next 12 months. BHEL expects another 25GW of FGD orders to be finalised by the end of fiscal year.
• Working capital cycle deteriorated in H1FY20 which resulted in gross receivables increasing from Rs346n to Rs384bn. As a result, the gross borrowing has increased from Rs30bn to Rs47bn.
• Overall, we expect FY20E revenues to remain flat yoy due to low execution in H1FY20.

Key positives: 19% yoy increase in order inflow in H1FY20.

Key negatives: Weak execution despite strong order backlog; deteriorating working capital cycle;

Impact on financials: Reduce our earnings estimates for FY20E/FY21E by 33%/15% to Rs9.2bn/Rs12.4bn to account for low revenue growth.

Valuations & view

BHEL’s market share gains and diversification efforts had led to steady order wins for the company. However, BHEL’s strong order backlog and improved share of executable orders had not resulted in expected revenue growth in H1FY20. While we expect H2FY20E and FY21E executions to improve on strong order backlog, the earnings continues to be at risk from higher than expected raw material costs and lower margins in recently diversified areas. As a result, we maintain our Neutral rating on the stock with a revised target price of Rs53, based on 15x FY20E earnings.