IDFC Securities - Bharat Heavy Electricals Limited (BHEL) BHELs Q3FY19 results (Neutral) - Gross margins impacted by higher RM costs

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IDFC Securities

Shirish Rane

BHEL's Q3FY19 results (Neutral) - Gross margins impacted by higher RM costs

Q3FY19 result highlights

BHEL reported weak Q3FY19 results due to higher raw material costs and forex MTM loss of Rs2.1bn. PAT grew 25.3%yoy to Rs1.9bn (est: Rs2.7bn).
Revenue grew 9.4%yoy to Rs73.4bn (est: Rs75.1bn) led by strong growth in revenue from industrial segment (up 40.8%yoy). Power segment revenues grew by only 2.9%yoy to Rs55bn.
EBITDA declined 27.6% yoy to Rs2.2bn and was below estimate of Rs4.3bn mainly due to forex MTM loss of Rs2.1bn during the quarter. EBITDA margins contracted 150 bps yoy to 3% below estimate of 5.7%. Adjusting for forex loss of Rs2.1bn/720m in Q3FY19/Q3FY18, EBITDA grew 13.8% yoy to Rs4.3bn and adjusted EBITDA margin stood at 5.8%. RM costs increased sharply by 440bp yoy to 62.4% due to higher imports during Q3FY19. Other income was elevated at Rs2.3bn (+73%yoy) due to interest of Rs870m on IT refund of Rs4.1bn.
Cash position declined from Rs71bn as on Sep-18 to Rs48bn currently on account of ~Rs7.3bn increase in debtors and buyback of Rs16.3bn. Debtors at Rs397bn in Dec-18 continue to remain elevated 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 51% of the total debtors.
Order inflow for Q3FY19 was Rs77bn and order backlog as on Dec 2018 stood at Rs1.2trn (3.8x TTM sales). For 9MFY19, the order inflow stood at Rs172bn. BHEL has an L1 order position of Rs225bn.
The board has declared an interim dividend of Rs0.8/ share.

Key positives: Strong L1 position

Key negatives: Lower than expected gross margins

Impact on financials: Upgrade of 14.1% in FY19E EPS due to lower provisions, lower interest costs & lower tax rate.

Valuations & view

BHEL’s market share gains and diversification efforts have led to steady order wins for the company. BHEL’s strong order backlog and improved share of executable orders has enhanced revenue visibility for FY20. While we expect 9%/35% revenue/earnings CAGR for BHEL over FY18-20, the earnings are at risk from higher than expected raw material costs (given the sharp and unexpected rise in Q3FY19). As a result, we maintain our Neutral rating on the stock with a revised target price of Rs68, based on 17x FY20E earnings (lowered from 20x due to risk to earnings from lower margins).

06/02/2019 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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