IDFC Securities - Bharat Heavy Electricals Limited (BHEL) BHELs Q3FY20 results (Neutral) - Another weak quarter led by slow execution

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IDFC Securities

Shirish Rane

BHEL's Q3FY20 results (Neutral) - Another weak quarter led by slow execution

Q3FY20 result highlights

BHEL reported a decline of 31% yoy in revenues to Rs57bn (est: Rs80bn). Execution remains sluggish as management focus is on minimising working capital requirements.
As a result, BHEL reported an EBITDA of Rs3.3bn (vs est of Rs4.5bn; EBITDA of Rs2.2bn in Q3FY19). As a result, the company reported profit of Rs1.6bn (vs our estimate of profit of Rs2.4bn)
Order inflow came in at Rs59bn/172bn in Q3Y20/9mFY20. As a result, order backlog marginally declined from Rs1.09trn at end of FY19 to Rs1.07tn (3.8x Book to Bill ratio) at end of Dec 2019.
BHEL is favourably placed in orders worth Rs130bn across thermal and industry orders. BHEL expects orders worth Rs400bn to be awarded over next 12 months. BHEL expects another 27GW of FGD orders to be finalised by the end of fiscal year.
BHEL does not expect Lara, Singaruli and Adilabad BTG tenders to be finalised in Q4FY20. It expects only Talcher BTG tender to be finalised where it is L1. It continues to guide for order inflow of Rs350-400bn for FY20E.
Overall, we expect FY20E revenues to decline yoy due to low execution in 9mFY20. Note that BHEL’s revenue target under MOU with government of India is Rs300bn.

Key negatives: Weak execution; Delay in finalisation of BTG tenders

Impact on financials: Reduce our earnings estimates for FY20E/FY21E by 33%/15% to Rs2.3/Rs3.0 to account for low revenue growth. Introduce our FY22E estimates.

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 9mFY20. While we expect 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 Rs45, based on 15x FY21E earnings.

24/02/2020 8 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.

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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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