Bharat Heavy Electricals
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- Loren Walters
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1 FY16 (Provisional) Result Update Institutional Equities Bharat Heavy Electricals 8 April 2016 Reuters: BHEL.BO; Bloomberg: BHEL IN Structural Headwinds Persist; Retain Sell The FY16 provisional results of Bharat Heavy Electricals (BHEL) were in line with our expectations on profitability as well as order inflow front. Gross turnover stood at Rs267bn, 8.4% below our estimate and down 13.7% YoY. Net loss for FY16 stood at Rs8.8bn, in line with our estimate of Rs9bn but higher than Bloomberg consensus estimate of a loss of Rs6bn. Order inflow was on expected lines at Rs437bn. The derived net revenue for 4QFY16 stood at Rs100bn (down 21% YoY), with EBITDA of Rs6.2bn (6.2% margin, down 710bps YoY) and PAT of Rs4bn (down 56% YoY). Insufficient orders in the industry has lead to intense competition and irrational pricing, which resulted in sustained pressure on margins, return ratios and working capital cycle of BHEL. We have retained Sell rating on BHEL with a target price of Rs105 based on 18xFY18E EPS. Revenue growth falters: With less orders to execute, BHEL reported a 13.7% YoY decline in provisional gross turnover for FY16 to Rs267bn despite a much lower base (net revenue witnessed a 21% CAGR decline from Rs484bn in FY13 to Rs302bn in FY15). Derived net revenue for FY16P stood at Rs252bn (assuming excise duty at 9MFY16 rate of 5.5%), 8.4% below our estimate. With 30% of the orders being slow-moving, we expect a mere 4.5% revenue CAGR over FY15-FY18E. Pressure on margins persists: Lack of operating leverage, lower realisation because of intense competition, rising share of super-critical projects and EPC projects (where in-house content is much lower) continued to exert pressure on profitability. Consequently, BHEL posted provisional net loss of Rs8.8bn for FY16. Order inflow position: Dearth of orders in the industry led BHEL to turn aggressive on the pricing front and it garnered a market share of 74% in FY16 with order inflow amounting to Rs437bn, in line with our estimate. Order inflow was up 42% YoY on a suppressed base. BHEL s average annual order intake fell from Rs576bn over FY08-FY11 to Rs280bn over FY12-FY15 (refer Exhibit 3). Key order wins in FY16 include an Rs180bn Yadadri project in Telangana and two projects of Rs23bn each at Krishnapatnam and Vijaywada in Andhra Pradesh which were awarded on a nomination basis (51% of annual inflow). Other notable order wins includes Rs56bn Uppur project, Rs35bn Karimnagar project and Rs28bn North Chennai project (refer Exhibit 2). We are factoring in order inflow amounting to Rs450bn each in FY17E and FY18E. Order backlog rose 9% YoY to Rs1,100bn. 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 BTG industry (35GW). With insufficient order placement activity, 4% RoE likely in FY18E and a high debtor position (Rs358bn as of 9MFY16-end), 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 award on nomination basis, sudden revival in thermal power capex and a fall in competitive intensity leading to better realisation. Net revenue 391, , , , ,097 EBITDA 45,198 24,851 (15,428) 3,676 14,108 Net profit 34,608 14,193 (9,003) 5,498 14,302 EPS (Rs) (3.7) EPS growth (%) (47.7) (59.0) NA NA EBITDA margin (%) (5.6) PER (x) NA P/BV (x) EV/EBITDA (x) NA Dividend yield (%) RoCE (%) (7.5) (2.0) 1.0 RoE (%) (2.7) SELL Sector: Capital Goods CMP: Rs119 Target Price: Rs105 Downside: 12% Chirag Muchhala chirag.muchhala@nirmalbang.com Key Data Current Shares O/S (mn) 2,447.6 Mkt Cap (Rsbn/US$bn) 291.9/ Wk H / L (Rs) 290/90 Daily Vol. (3M NSE Avg.) 9,043,647 One Year Indexed Stock Performance Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 BHARAT HEAVY ELECTRICALS Nifty 50 Price Performance (%) 1 M 6 M 1 Yr BHEL 12.5 (41.5) (49.4) Nifty Index 0.8 (7.2) (13.4) Source: Bloomberg
2 Exhibit 1: Provisional results versus our estimates (Rsmn) FY16P FY16E Variation (%) FY15 YoY growth (%) Turnover 267, ,539 (8.4) 309,470 (13.7) Less: Excise duty* 14,686 16,035-14,050 - Net revenue 252, ,504 (8.4) 301,830 (16.4) PAT (8,770) (9,003) (2.6) 14,193 NA PAT margin (%) (3.5) (3.3) * Excise duty assumed at 9MFY16 rate of 5.5% of turnover, (P = provisional, E = estimate) Exhibit 2: Key BTG projects awarded over the past two years in India Project Developer Winner Value (Rsbn) Unit size (MW) Scope Uppur TANGEDCO BHEL x800 BTG Tuticorin SPIC Electric BHEL x525 BTG Karimnagar NTPC BHEL x800 Boiler North Chennai TANGEDCO BHEL x800 BTG Barh 1 NTPC Doosan x660 Boiler Vijaywada* APGENCO BHEL x800 BTG Krishnapatnam* APGENCO BHEL x800 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:* Three projects in Telangana and two projects in Andhra Pradesh awarded to BHEL on nomination basis Source: Respective companies, Industry, Nirmal Bang Institutional Equities Research Exhibit 3: Annual order intake trend of BHEL (Rsbn) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16P 2 Bharat Heavy Electricals
3 Exhibit 4: Upcoming power projects for bidding Project State Developer Unit size (MW) Scope Pudimadaka Andhra Pradesh NTPC 4x1,000 BTG Udangudi Tamil Nadu TNEB 2x660 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 Maitree (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 Institutional Equities Research 3 Bharat Heavy Electricals
4 Financial statement Exhibit 5: Income statement Net sales 391, , , , ,097 % growth (19.2) (22.8) (8.7) Raw material costs 225, , , , ,587 Staff costs 59,338 54,500 53,723 61,260 65,378 Other overheads 61,364 53,277 63,641 52,071 54,023 Total expenditure 345, , , , ,989 EBITDA 45,198 24,851 (15,428) 3,676 14,108 % growth (51.9) (45.0) NA NA EBITDA margin (%) (5.6) Other income 16,160 8,340 12,510 14,387 16,544 Interest costs 1, Depreciation 9,829 10,773 9,748 10,242 10,617 Profit before tax 50,203 21,501 (12,862) 7,637 19,864 Tax 15,535 7,207 (3,858) 2,138 5,562 Net profit 34,668 14,294 (9,003) 5,498 14,302 Prior period expenses Reported net profit 34,608 14,193 (9,003) 5,498 14,302 PAT margin (%) (3.3) EPS (Rs) (3.7) % growth (47.7) (59.0) NA NA Exhibit 7: Balance sheet Share capital 4,895 4,895 4,895 4,895 4,895 Reserves 325, , , , ,448 Net worth 330, , , , ,343 Short-term loans 25, Long-term loans 1, Total loans 26, Deferred tax liability (net) (19,690) (22,207) (22,207) (22,207) (22,207) Total liabilities 337, , , , ,746 Fixed assets 56,301 53,351 46,583 41,835 36,593 Investments 4,202 4,177 4,177 4,177 4,177 Inventories 97, ,017 95, , ,841 Debtors 280, , , , ,242 Cash 118,729 98,127 59,307 70,389 90,687 Other current assets 153, , , , ,265 Total current assets 650, , , , ,035 Creditors 87,178 87,989 92,728 98, ,736 Other current liabilities & provisions 283, , , , ,705 Total current liabilities 370, , , , ,441 Net current assets 279, , , , ,594 Total assets 337, , , , ,746 Exhibit 6: Cash flow EBIT 35,369 14,078 (25,176) (6,567) 3,491 (Inc.)/dec. in working capital 4,125 (9,315) (33,133) 1,773 3,814 Cash flow from operations 39,494 4,763 (58,310) (4,793) 7,305 Other income 16,160 8,340 12,510 14,387 16,544 Depreciation 9,829 10,773 9,748 10,242 10,617 Tax paid (-) (19,718) (9,725) 3,858 (2,138) (5,562) Net cash from operations 45,765 14,152 (32,193) 17,697 28,905 Capital expenditure (-) (6,879) (4,006) (5,000) (5,000) (5,000) Net cash after capex 38,887 10,146 (37,193) 12,697 23,905 Interest paid (-) (1,326) (917) (195) (183) (171) Dividends paid (-) (8,104) (3,322) (1,432) (1,432) (3,436) Inc./(dec.) in short-term borrowing 12,640 (25,500) Inc./(dec.) in long-term borrowing (244) (438) Inc./(dec.) in total borrowings 12,396 (25,938) Inc./(dec.) in investments Cash from financial activities 3,056 (30,152) (1,627) (1,615) (3,607) Others (534) (597) Opening cash balance 77, ,729 98,127 59,307 70,389 Closing cash balance 118,729 98,127 59,307 70,389 90,687 Change in cash balance 41,408 (20,602) (38,820) 11,082 20,297 Exhibit 8: Key ratios Y/E March FY14 FY15 FY16E FY17E FY18E Per share (Rs) EPS (3.7) Book value Valuation (x) P/E NA P/BV EV/EBITDA NA EV/sales Return ratios (%) RoCE (7.5) (2.0) 1.0 RoE (2.7) RoIC (9.9) (2.5) 1.4 Profitability ratios (%) EBITDA margin (5.6) EBIT margin (9.1) (2.1) 1.0 PAT margin (3.3) Turnover ratios Total asset turnover ratio (x) Debtor days Inventory days Creditors days Bharat Heavy Electricals
5 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 November 2015 Sell January 2016 Sell February 2016 Sell April 2016 Sell Bharat Heavy Electricals
6 Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang group has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. Reports based on technical and derivative analysis may not match with reports based on a company's fundamental analysis. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited. NBEPL has registered with SEBI as a Research Entity in terms of SEBI (Research Analyst) Regulations, (Registration No: INH to ). NBEPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBEPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBEPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /8101, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /8103, Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai Board No. : /1; Fax. : Bharat Heavy Electricals
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