Bharat Heavy Electricals

Transcription

1 2QFY16 Result Update Bharat Heavy Electricals 9 November 2015 Reuters: BHEL.BO; Bloomberg: BHEL IN Losses Mount, Structural Headwinds Persist; Retain Sell Bharat Heavy Electricals (BHEL) posted 2QFY16 revenue of Rs59.4bn, down 4% YoY but 9%/5% above our/consensus estimates, respectively. BHEL posted operating loss for the second quarter in a row with raw material costs, as a percentage of sales, shooting up sharply by 1,000bps YoY to 65.8%. EBITDA loss stood at Rs4.7bn (negative 8% margin) while net loss was at Rs2bn (partly aided by tax write-back of Rs1.2bn) compared to our/consensus profit estimate of Rs1.8bn each. Order inflow in 2QFY16 was dismal at Rs24bn but BHEL has received two BTG projects on nomination basis from Andhra Pradesh worth Rs46bn in 3QFY16 in addition to its existing L1 status on projects amounting to Rsbn. However, execution will remain a challenge as the proportion of slow-moving projects is on the rise. Projects worth Rs370bn (up from Rs240bn in 1QFY16) forming 33% of current order book are on hold. Factoring in 1HFY16 performance and intense pricing pressure likely in the near term, we have cut our earnings estimates for FY16/FY17 by 54%/23%, respectively. We have retained Sell rating on BHEL with a revised target price of Rs174 (Rs earlier) based on 18xFY17E earnings (25% discount to the past 10 years median P/E of 24x). Order inflow position: BHEL reported order inflow of only Rs24bn in 2QFY16 as no power plant EPC projects were finalised during the quarter. Consequently, the order backlog fell 3% QoQ to Rs1,123bn. However, close on the heels of receiving 6GW projects on nomination basis from Telangana, BHEL secured two more BTG projects of 1.6GW (1x800MW each) from Andhra Pradesh on nomination basis worth Rs46bn in 3QFY16. Further, BHEL has L1 position in projects worth Rsbn including NTPC Barethi (4x660MW), Bhusaval (1x660MW), Tuticorin (1x525MW), Rourkela (1x250MW), Karimnagar (2x800MW boiler) and Pudimadaka (4x1000MW turbines). The current market share of BHEL is 74% which the management expects to retain as BHEL has turned aggressive in pricing to support its large installed capacity base of 20GW. We have increased our FY16 order inflow estimate from Rs425bn to Rs500bn, but execution remains challenging. Execution to remain weak, margin suppressed: With lesser orders to execute, BHEL posted a 21% revenue CAGR decline over FY13-FY15. Execution traction is likely to remain weak as projects worth Rs370bn (33% of order book) are on hold because of external factors. We expect a mere 8.5% revenue CAGR over FY15-FY17E on a significantly low base of FY15. Margin is under pressure because of: (a) Lower realisation on account of competitive intensity, (b) Rising input prices of certain components (CRGO steel price has increased 50% in the past few months),and (c) Rising share of super-critical projects awarded on JDU (joint deed of undertaking) basis where BHEL has to outsource a portion of work (higher than 15% of project costs) to its technology partners Alstom (for boilers) and Siemens (turbines) to obtain their performance guarantees. Consequently, we have cut our operating margin estimates for FY16/FY17 from 10%/12% to 4%/8.5%, respectively. Outlook: With rising preference towards renewable energy generation and transmission loss reduction, we are structurally negative on thermal power capacity addition beyond 15GW per annum in India, clearly insufficient for a much higher installed capacity base in the industry (35GW). With insufficient order placement activity in the industry, 7% RoE in FY17E and a high debtor position (Rs370bn), we remain negative on BHEL. Key risks: Key risks to our Sell rating on BHEL are winning a large ticket size order (like an ultra mega power project), continuation of large project awards on nomination basis, sudden revival in thermal power sector capex and a fall in competitive intensity leading to better realisation. SELL Sector: Capital Goods CMP: Rs192 Target Price: Rs174 Downside: 10% Chirag Muchhala chirag.muchhala@nirmalbang.com Key Data Current Shares O/S (mn) 2,447.6 Mkt Cap (Rsbn/US$bn) 471.3/ Wk H / L (Rs) 300/187 Daily Vol. (3M NSE Avg.) 4,781,490 Price Performance (%) 1 M 6 M 1 Yr BHEL (2.6) (16.2) (25.4) Nifty Index (2.3) (1.7) (4.5) Source: Bloomberg Y/E March standalone (Rsmn) 2QFY15 1QFY16 2QFY16 YoY (%) QoQ (%) 1HFY15 1HFY16 YoY (%) Net revenue 61,440 43,617 59,380 (3.4) , ,997 (8.8) Raw material costs 34,338 23,752 39, ,304 62, Staff costs 15,956 14,615 14,816 (7.1) ,727 29,432 (7.2) Other expenses 8,231 7,343 10, ,865 17, Total expenditure 58,525 45,710 64, , , EBITDA 2,916 (2,093) (4,742) NA ,095 (6,835) NA OPM (%) 4.7 (4.8) (8.0) (6.6) - Depreciation 2,662 2,425 2,249 (15.5) (7.3) 5,388 4,674 (13.2) Interest costs (65.4) (87.3) Other income 1,961 4,924 3, (24.2) 5,439 8, PBT 2, (3,302) NA NA 4,547 (2,929) NA Tax (1,253) NA NA 1,364 (1,219) NA Net profit 1, (2,049) NA NA 3,183 (1,710) NA NPM (%) (3.5) (1.7) - EPS (Rs) (0.8) NA NA 1.3 (0.7) NA

2 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Exhibit 1: Financial summary Net revenue 484, , , , ,469 EBITDA 93,898 45,198 24,851 11,826 30,215 Net profit 66,147 34,608 14,193 9,540 23,626 EPS (Rs) EPS growth (%) (6.7) (47.7) (59.0) (32.8) EBITDA margin (%) P/E (x) P/BV (x) EV/EBITDA (x) Dividend yield (%) RoCE (%) RoE (%) Exhibit 2: Segment-wise snapshot Y/E March 2QFY15 1QFY16 2QFY16 YoY (%) QoQ (%) 1HFY15 1HFY16 YoY (%) Revenue (Rsmn) Power 47,370 33,571 48, ,811 82,114 (7.5) Industry 15,824 11,436 13,390 (15.4) ,154 24,825 (8.6) Revenue mix (%) Power Industry EBIT (Rsmn) Power 6,661 2,162 (279) NA NA 11,911 1,883 (84.2) Industry (434) NA NA 689 (405) NA EBIT margin (%) Power (0.6) Industry (3.2) (1.6) - Exhibit 3: Quarterly order book position Order intake tapers off 1,800 1, 1, 1, 1, Order intake (LHS) Order backlog (RHS) Exhibit 4: Actual performance versus our estimates, Bloomberg consensus estimates 2QFY16 (Rsmn) Actual Our estimate Deviation (%) Bloomberg cons. est. Deviation (%) Revenue 59,380 54, , EBITDA (4,742) 2,293 NA 2,428 NA PAT (2,049) 1,815 NA 1,720 NA Source: Company, Bloomberg, Nirmal Bang Research 2 Bharat Heavy Electricals

3 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16 Exhibit 5: Annual order inflow trend ( ,800 1, 1, 1, 1, Order intake (LHS) Order backlog (RHS) Exhibit 6: Key BTG projects awarded over the past two years in India Project Developer Winner Value Unit size (MW) Scope Vijaywada* APGENCO BHEL x800 BTG Krishnapatnam* APGENCO BHEL 23,1 1x800 BTG Harduaganj UPRVUNL Toshiba - JSW x660 EPC Yadadri* TSGENCO BHEL x800 EPC Khargone NTPC L&T x660 EPC Manuguru* TSGENCO BHEL x270 EPC Kothagudem* TSGENCO BHEL x800 EPC Yelahanka KPCL BHEL x370 EPC Wanakbori GSECL BHEL x800 EPC Ennore SEZ TNEB BHEL x660 EPC + extended BoP Shree Singaji MPGENCO L&T x660 EPC Tanda NTPC L&T x660 Boiler Tanda NTPC Bharat Forge - Alstom x660 TG Ennore TNEB Lanco Infratech x660 EPC + extended BoP Note: 3 projects in Telangana and 2 in Andhra Pradesh awarded to BHEL on nomination basis Source: Respective companies, Industry, Nirmal Bang Research Exhibit 7: Upcoming projects for bidding Project State Developer Unit size (MW) Scope Ramagudem Telangana NTPC 2x800 BTG Pudimadaka Andhra Pradesh NTPC 4x1000 BTG Udangudi Tamil Nadu TNEB 2x660 EPC Tuticorin# Tamil Nadu SCPC 1x525 EPC Barethi# Madhya Pradesh NTPC 4x660 BTG Katwa West Bengal NTPC 2x660 BTG Ghatampur Uttar Pradesh Neyveli Lignite 3x660 BTG Panki Uttar Pradesh UPRVUNL 1x660 BTG Rampal Bangladesh NTPC-BPDB 2x660 BTG Bhusawal# Maharashtra MAHAGENCO 1x660 EPC Nashik Maharashtra MAHAGENCO 1x660 BTG Pakaldul Hydro# J&K NHPC 4x250 EPC Rourkela Odisha NSPCL 1x250 EPC Note: # BHEL has L1 status Source: Industry, Nirmal Bang Research 3 Bharat Heavy Electricals

4 May-06 Jan-07 Oct-07 Jun-08 Feb-09 Oct-09 Jun-10 Feb-11 Oct-11 Jun-12 Feb-13 Oct-13 Jun-14 Feb-15 Oct-15 May-06 Jan-07 Oct-07 Jun-08 Feb-09 Oct-09 Jun-10 Feb-11 Oct-11 Jun-12 Feb-13 Oct-13 Jun-14 Feb-15 Oct-15 Exhibit 9: P/E trend (x) Exhibit 8: Change in our earnings estimates (Rsmn) Old New Deviation (%) Y/E March FY16E FY17E FY16E FY17E FY16E FY17E Revenue 310, , , ,469 (4.9) (2.5) EBITDA 31,238 43,371 11,826 30,215 (62.1) (30.3) PAT 20,984 30,587 9,540 23,626 (54.5) (22.8) Source: Nirmal Bang Research (Rs) Median P/E = 23.8x P/E Median P/E Stock price 4x 8x 12x 16x 20x 24x Source: Bombay Stock Exchange, Nirmal Bang Research 4 Bharat Heavy Electricals

5 Financial statement Exhibit 10: Income statement Net sales 484, , , , ,469 % growth 1.7 (19.2) (22.8) (2.0) 20.2 Raw material costs 273, , , , ,172 Staff costs 57,528 59,338 54,500 53,219 58,652 Other overheads 59,263 61,364 53,277 53,219 60,430 Total expenditure 390, , , , ,254 EBITDA 93,898 45,198 24,851 11,826 30,215 % growth 2.1 (51.9) (45.0) (52.4) EBITDA margin (%) Other income 11,217 16,160 8,340 12,510 15,012 Interest costs 1,253 1, Depreciation 9,534 9,829 10,773 10,358 10,845 Profit before tax 94,328 50,203 21,501 13,826 34,241 Tax 28,177 15,535 7,207 4,286 10,615 Net profit 66,151 34,668 14,294 9,540 23,626 Prior-period expenses Reported net profit 66,147 34,608 14,193 9,540 23,626 PAT margin (%) EPS (Rs) % growth (6.7) (47.7) (59.0) (32.8) Exhibit 12: Balance sheet Share capital 4,895 4,895 4,895 4,895 4,895 Reserves 299, , , , ,090 Net worth 304, , , , ,985 Short-term loans 12,860 25, Long-term loans 1,292 1, Total loans 14,152 26, Deferred tax liability (net) (15,507) (19,690) (22,207) (22,207) (22,207) Total liabilities 303, , , , ,388 Gross block 107, , , , ,066 Depreciation 63,248 73,576 84,483 94, ,686 Net block 44,585 46,929 41,405 38,225 32,380 Capital work in progress 11,716 6,421 5,178 3,000 3,000 Investments 4,292 4,202 4,177 4,177 4,177 Inventories 117,638 97, , , ,710 Debtors 292, , , , ,644 Cash 77, ,729 98, , ,069 Other current assets 137, , , , ,020 Total current assets 625, , , , ,443 Creditors 96,752 87,178 87,989 89, ,498 Other current liabilities & provisions 285, , , , ,114 Total current liabilities 382, , , , ,612 Net current assets 242, , , , ,831 Total assets 303, , , , ,388 Exhibit 3: Exhibit 11: Cash flow EBIT 84,364 35,369 14,078 1,468 19,370 (Inc.)/dec. in working capital (53,122) 4,125 (9,315) (7,684) (11,716) Cash flow from operations 31,242 39,494 4,763 (6,215) 7,653 Other income 11,217 16,160 8,340 12,510 15,012 Depreciation 9,534 9,829 10,773 10,358 10,845 Interest paid (-) (1,253) (1,326) (917) (153) (140) Tax paid (-) (28,189) (19,718) (9,725) (4,286) (10,615) Dividends paid (-) (15,493) (8,104) (3,322) (4,868) (7,159) Net cash from operations 7,058 36,335 9,913 7,346 15,596 Capital expenditure (-) (3,014) (6,879) (4,006) (5,000) (5,000) Net cash after capex 4,044 29,456 5,907 2,346 10,596 Inc./(dec.) in short-term borrowing 11,993 12,640 (25,500) - - Inc./(dec.) in long-term borrowing (1,529) (244) (438) - - Inc./(dec.) in total borrowings 10,464 12,396 (25,938) - - Inc./(dec.) in investments (4,233) Cash from financial activities 6,231 12,486 (25,913) - - Others (298) (534) (597) - - Opening cash balance 67,343 77, ,729 98, ,473 Closing cash balance 77, ,729 98, , ,069 Change in cash balance 9,978 41,408 (20,602) 2,346 10,596 Exhibit 4: Exhibit 13: Key ratios Y/E March FY13 FY14 FY15 FY16E FY17E Per share (Rs) EPS Book value Valuation (x) P/E P/BV EV/EBITDA EV/sales Return ratios (%) RoCE RoE RoIC Profitability ratios (%) EBITDA margin EBIT margin PAT margin Turnover ratios Total asset turnover ratio (x) Debtor days Inventory days Creditors days Bharat Heavy Electricals

6 Rating track Date Rating Market price (Rs) Target price (Rs) 27 January 2012 Buy January 2012 Buy April 2012 Hold April 2012 Hold May 2012 Hold July 2012 Hold September 2012 Hold October 2012 Sell October 2012 Sell January 2013 Sell February 2013 Sell March 2013 Sell April 2013 Sell April 2013 Sell May 2013 Sell July 2013 Sell August 2013 Sell October 2013 Sell November 2013 Sell January 2014 Sell February 2014 Sell April 2014 Sell April 2014 Sell June 2014 Sell July 2014 Sell August 2014 Sell October 2014 Sell November 2014 Sell December 2014 Sell January 2015 Sell February 2015 Sell April 2015 Sell April 2015 Sell May 2015 Sell July 2015 Sell August 2015 Sell October 2015 Sell Bharat Heavy Electricals

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