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BHEL's Q1FY20 results (Neutral) - Marred by low execution

Q1FY20 result highlights

• BHEL reported a decline of 29% yoy in revenues to Rs45bn (est: Rs64bn) led by slow-down in execution in order from Telangana and Tamil Nadu DISCOM primarily related to land acquisition issues at project sites. Management expects execution to pick up from Q2FY20E.
• Sharp decline in revenue has led to BHEL reporting a loss at EBITDA of Rs2.7bn (vs EBITDA of Rs2.9bn in Q1FY19). As a result, the company reported loss of Rs2.1bn (vs our estimate of profit of Rs2.1bn). Note that company has reported loss after 13 quarters
• Order inflow came in at Rs39bn, a decline of 11% yoy. As a result, order backlog marginally declined from Rs1.09trn at end of FY19 to Rs1.07tn (3.5x Book to Bill ratio) at end of June 2019. The lower order intake is driven by delay in finalisation of various large BTG orders like Talcher and Singareni.
• BHEL is favourably placed in orders of large BTG orders & a host of FGD tenders and expects further tender pipeline of 10-11GW of power orders across coal, hydro and nuclear. BHEL expects another 30GW of FGD orders to be finalised by the end of this fiscal year.
• Working capital cycle deteriorated in Q1FY20 which resulted in gross receivables increased from Rs346n to Rs379bn.  BHEL resorted to borrowing from market to partly fund the incremental working capital needs. As a result, the gross borrowing has increased from Rs30bn to Rs40bn.

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

Impact on financials: Reduce our earnings estimates for FY20E/FY21E by 7%/5% to Rs13.6bn/Rs14.6bn to account for slow execution in current quarter.

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 7.8%/9.5% revenue/earnings CAGR for BHEL over FY19-21E, the earnings are 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 Rs59, based on 15x FY20E earnings.