Bharat Heavy Electricals

Transcription

1 2QFY18 Result Update Bharat Heavy Electricals 8 November 2017 Reuters: BHEL.BO; Bloomberg: BHEL IN Weak Performance, Challenging Outlook; Retain Sell Bharat Heavy Electricals (BHEL) posted 2QFY18 revenues of Rs63bn, down 3% YoY and 5%/6% below our/consensus estimate, respectively. Raw material costs, as a percentage of sales, fell 510bps YoY to 59.9% leading to gross margin expansion to 40.1%, flat QoQ but up from 35% in 2QFY17. Other expenses jumped 82% YoY to Rs12.5bn (owing to provisions worth Rs2.5bn for wage revision and Rs3bn for contingency) leading to EBITDA loss of Rs954mn versus our/consensus profit estimate of Rs1.9bn/Rs2.5bn, respectively. With a sharp rise in other income (up 147% YoY at Rs4.8bn because of Rs1.8bn forex gain), PAT rose 6% YoY to Rs1.1bn. The bottom-line was below our/consensus estimate of Rs1.2bn/Rs1.6bn, respectively. Order backlog remained weak at Rs971bn (down 6% YoY), while 2QFY18 order inflow remained muted at Rs19bn. BHEL is focusing on ramping up the execution of its executable order book (Rs770bn), but it is likely to face challenges as orders worth Rs216bn are non-moving, award of L1 contracts continues to get delayed, tender pipeline remains modest and the competition remains severe. With operating loss of Rs1.8bn in 1HFY18, we have cut our EBITDA estimate for FY18/FY19 by 11%/10% respectively. While our earnings estimate of FY19 stands reduced by 7%, the same for FY18 has been revised upwards by 10% because of significantly higher other income of Rs9.5bn in 1HFY18 (up 113% YoY). We have rolled forward our valuation of BHEL to 1HFY20E financials with a revised target price of Rs82 (Rs77 earlier) based on 16x September 2019E earnings. We have retained Sell rating on the stock. Order inflow position: BHEL reported weak order inflow of Rs19bn in 2QFY18 and Rs37bn in 1HFY18 as no BTG contract was awarded during this period. The award of four L1 projects (3x800MW Patratu, 1x660MW Bhusaval, 1x660MW Panki and 2x660MW Udangudi) worth Rs260bn continues to get delayed. BHEL expects annual order placement of 10GW for the industry in the medium term based on tenders in the pipeline. We have retained our order inflow estimate for FY18/FY19 of Rs325bn/Rs400bn, respectively. Order backlog remains weak: Order backlog remains weak at Rs971bn, down 6% YoY. With Yadadri project (5x800MW worth Rs200bn) receiving final clearance, the executable order book stands at ~Rs770bn. Out of the remaining Rs216bn non-moving orders, three projects worth Rs78bn (Rattan India Power, Nashik & Amravati, and Visa Power) are likely to get cancelled. Outlook: With a rising preference towards renewable energy generation and transmission loss reduction, we are structurally negative on thermal power capacity addition beyond 10GW per annum in India, clearly insufficient for a much higher installed capacity base of the BTG industry (35GW). With insufficient order placement activity in the industry, 6% RoE and 5% RoCE in FY20E and a high debtor position, 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), award of large projects 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: Rs93 Target Price: Rs82 Downside: 12% Chirag Muchhala Research Analyst chirag.muchhala@nirmalbang.com Key Data Current Shares O/S (mn) 3,671.4 Mkt Cap (Rsbn/US$bn) 342.2/ Wk H / L (Rs) 122/77 Daily Vol. (3M NSE Avg.) 9,983,427 Price Performance (%) 1 M 6 M 1 Yr BHEL 9.5 (19.1) 0.5 Nifty Index Source: Bloomberg Y/E March standalone (Rsmn) 2QFY17 1QFY18 2QFY18 YoY (%) QoQ (%) 1HFY17 1HFY18 YoY (%) Revenues 66,012 55,056 63,849 (3.3) , ,905 (2.6) Raw material costs 42,901 32,954 38,252 (10.8) ,370 71,206 (9.1) Staff costs 14,644 14,088 13,988 (4.5) (0.7) 29,008 28,076 (3.2) Other expenses 6,916 8,897 12, ,491 21, Total expenditure 64,461 55,939 64, , , EBITDA 1,551 (883) (954) NA 8.1 2,262 (1,837) NA EBITDA margin (%) 2.4 (1.6) (1.5) (1.5) - Depreciation 2,080 2,001 1,872 (10.0) (6.5) 4,262 3,873 (9.1) Interest costs (16.0) 107 1,209 1,031.3 Other income 1,961 4,622 4, ,454 9, PBT 1,382 1,080 1, ,347 2, Tax Net profit 1, , ,868 1, Other comprehensive income (85) NA 0.7 (298) 54 NA Total comprehensive income 1, , ,569 2, NPM (%) EPS (Rs) Source: Company, Nirmal Bang Research

2 Exhibit 1: Financial summary Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Net revenues 254, , , , ,681 EBITDA (13,667) 11,009 11,623 20,205 25,176 Net profit (7,096) 4,959 10,928 16,477 21,216 EPS (Rs) (1.9) EPS growth (%) NA NA EBITDA margin (%) (5.4) P/E (x) NA P/BV (x) EV/EBITDA (x) NA Dividend yield (%) RoCE (%) (7.1) RoE (%) (2.2) Source: Company, Nirmal Bang Research Other takeaways from 2QFY18 conference-call Receivables in 1HFY18 stood at Rs330bn, out of which outstanding for more than one year amounted to Rs65bn. Retention money stood at Rs170bn. Other expenses were high as BHEL made provisions of Rs2.5bn towards wage revision in 2QFY18 (versus nil in FY17) and Rs3bn towards contingency (versus a write-back of Rs830mn in 2QFY17). Out of Rs971bn order backlog, industry sector accounts for Rs75bn while power sector accounts for the rest. BHEL received order for 30 locomotives of 6,000HP from Indian Railways after a gap of 10 years. Total order inflow from industry sector was Rs22bn in 1HFY18 versus Rs19bn in 1HFY17. Out of total order book, international projects account for Rs135bn. BHEL has set its FY18 MoU target of Rs315bn (at an excellent level) and Rs310bn (at a very good level) with the government. At the time of finalisation of the target, BHEL expected the Rs200bn Yedadri project to get all clearances in 4QFY17, but the project received final clearance in October 2017 and hence the revenue booking from it in FY18 will be minimal. BHEL expects to complete the execution of first two units in 36 months. BHEL recently completed 2x660MW project of Singareni Collieries in Telangana. They are likely to go for project extension by adding one more unit of 800MW. BHEL is likely to be awarded this unit as well. Tenders already floated in the market comprises thermal projects such as Talcher (2x660MW), Singrauli (2x660MW), Neyveli (2x660MW) and Sagardighi (1x660MW) as well as hydro projects such as Loktak (2x33MW), Kiru (4x156MW), Pulavarum (12x80MW) and Pakaldul (4x250MW). NTPC has floated tenders for 33GW towards FGD requirement in existing thermal power plants. BHEL has made full provision towards the three projects of Rattan India Nashik, Rattan India Amravati (both worth Rs54bn) and Visa Power (Rs24bn) which are likely to get cancelled. Hence, there will be no P&L impact of its cancellation. However, they are still a part of the order book as arbitration is underway. The industry segment posted weak revenues and low margins in 1HFY18 owing to slowdown in execution of solar projects, which BHEL expects to be temporary in nature. The tenders worth Rs50bn for solar projects are in the pipeline, which BHEL will be bidding for. BHEL expects annual order placement of 10GW for the industry over the medium term considering the thermal as well as hydro power projects in the pipeline. BHEL is strongly focusing on reducing raw material cost content as well as reviving non-moving projects. 2 Bharat Heavy Electricals

3 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 1HFY18 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 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Exhibit 2: Actual performance versus our estimates, Bloomberg consensus estimates 2QFY18 (Rsmn) Actual Our estimate Deviation (%) Bloomberg cons. Est. Deviation (%) Revenues 63,849 67,516 (5.4) 67,934 (6.0) EBITDA (954) 1,931 NA 2,546 NA PAT 1,154 1,256 (8.1) 1,583 (27.1) Source: Company, Bloomberg, Nirmal Bang Research Exhibit 3: Segment-wise snapshot Y/E March 2QFY17 1QFY18 2QFY18 YoY (%) QoQ (%) 1HFY17 1HFY18 YoY (%) Revenues (Rsmn) Power 52,541 43,356 50,647 (3.6) ,896 94,003 (2.0) Industry 15,260 12,714 11,037 (27.7) (13.2) 29,117 23,751 (18.4) Revenue mix (%) Power Industry EBIT (Rsmn) Power 5,052 4,386 6, ,153 11, Industry (80.5) (97.8) (12.8) EBIT margin (%) Power Industry Source: Company, Nirmal Bang Research Exhibit 4: Quarterly order book position (Rsbn) Order intake tapers off (Rsbn) 1,800 1,600 1,400 1,200 1, Order intake (LHS) Order backlog (RHS) Source: Company, Nirmal Bang Research Exhibit 5: Annual order inflow trend (Rsbn) ( (Rsbn) ,800 1,600 1,400 1,200 1, Order intake (LHS) Order backlog (RHS) Source: Company, Nirmal Bang Research 3 Bharat Heavy Electricals

4 Exhibit 6: Change in our estimates Y/E March Old estimates New estimates Change (%) (Rsmn) FY18E FY19E FY18E FY19E FY18E FY19E Revenues 293, , , , EBITDA 13,090 22,524 11,623 20,205 (11.2) (10.3) PAT 9,939 17,820 10,928 16, (7.5) Source: Company, Nirmal Bang Research Exhibit 7: Key BTG projects awarded over the past three years in India Project Developer Winner Value (Rsbn) Unit size (MW) Scope Maitree (Rampal) # NTPC-BPDB BHEL x660 EPC + extended BoP Bithnok and Barsingsar Neyveli Lignite Reliance Infra x250 each EPC Ghatampur Neyveli Lignite Bharat Forge - Alstom x660 TG Ghatampur Neyveli Lignite L&T x660 Boiler Rourkela NSPCL BHEL x250 EPC Uppur TANGEDCO BHEL x800 BTG Tuticorin SPIC Electric BHEL x525 BTG Karimnagar NTPC Bharat Forge - Alstom x800 TG 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 Research Exhibit 8: Upcoming projects for bidding Project State Developer Unit size (MW) Scope Udangudi # Tamil Nadu TNEB 2x660 EPC Patratu # Jharkhand NTPC 3x800 BTG Panki # Uttar Pradesh UPRVUNL 1x660 BTG Bhusawal # Maharashtra MAHAGENCO 1x660 EPC Nashik Maharashtra MAHAGENCO 1x660 BTG Pakaldul Hydro Jammu & Kashmir NHPC 4x250 EPC Talcher Odisha NTPC 2x660 BTG Singrauli Uttar Pradesh NTPC 2x660 BTG Neyveli Tamil Nadu NLC 2x660 BTG Sagardighi West Bengal WBPDC 1x660 BTG Khurja Uttar Pradesh THDC 2x660 BTG Buxar Bihar SJVN 2x660 BTG Note: # BHEL has L1 status; Source: Industry, Nirmal Bang Research 4 Bharat Heavy Electricals

5 Financial statement Exhibit 9: Income statement Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Net sales 254, , , , ,681 YoY growth (%) (15.7) Raw material costs 161, , , , ,679 Staff costs 53,798 53,999 56,655 63,615 70,787 Other overheads 53,507 46,114 48,142 51,024 56,040 Total expenditure 268, , , , ,505 EBITDA (13,667) 11,009 11,623 20,205 25,176 YoY growth (%) NA NA EBITDA margin (%) (5.4) Other income 14,977 7,264 13,797 12,590 14,010 Interest costs 3,595 3,506 3,134 2,910 2,910 Depreciation 9,357 8,488 8,093 8,486 8,722 Profit before tax (11,642) 6,278 14,192 21,399 27,554 Tax (4,546) 1,320 3,264 4,922 6,337 Net profit (7,096) 4,959 10,928 16,477 21,216 PAT margin (%) (2.8) EPS (Rs) (1.9) YoY growth (%) NA NA Source: Company, Nirmal Bang Research Exhibit 11: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Share capital 4,895 4,895 7,343 7,343 7,343 Reserves 316, , , , ,865 Net worth 321, , , , ,208 Total loans 1, Total liabilities 323, , , , ,104 Gross block 132, , , , ,835 Depreciation 93, , , , ,630 Net block 38,251 34,911 31,413 26,927 22,205 Capital work in progress 4,552 2,731 1,000 1,000 1,000 Investments 6,642 6,614 6,614 6,614 6,614 Inventories 96,022 73,724 75,102 80,464 87,682 Debtors 335, , , , ,573 Cash 100, , , , ,234 Other current assets 33,137 32,357 33,598 37,997 43,801 Total current assets 565, , , , ,290 Creditors 94,446 93,403 92,204 99, ,636 Other current liabilities & provisions 234, , , , ,783 Total current liabilities 328, , , , ,419 Net current assets 237, , , , ,871 Deferred tax asset (net) 36,592 38,414 38,414 38,414 38,414 Total assets 323, , , , ,104 Source: Company, Nirmal Bang Research Exhibit 10: Cash flow Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E EBIT (23,024) 2,520 3,529 11,719 16,454 (Inc.)/dec. in working capital 34,186 (76) 7,301 (8,161) (12,525) Cash flow from operations 11,161 2,445 10,831 3,557 3,929 Other income 14,977 7,264 13,797 12,590 14,010 Depreciation 9,357 8,488 8,093 8,486 8,722 Tax paid (-) (9,839) (3,141) (3,264) (4,922) (6,337) Net cash from operations 25,657 15,056 29,457 19,712 20,323 Capital expenditure (-) (5,578) (3,327) (2,864) (4,000) (4,000) Net cash after capex 20,079 11,729 26,593 15,712 16,323 Interest paid (-) (3,595) (3,506) (3,134) (2,910) (2,910) Dividends paid (-) (1,179) (4,525) (7,732) (10,739) (12,887) Inc./(dec.) in total borrowings 653 (367) (Inc.)/dec. in investments (2,465) Cash from financial activities (6,586) (8,371) (10,866) (13,649) (15,797) Others (10,760) Opening cash balance 98, , , , ,707 Closing cash balance 100, , , , ,234 Change in cash balance 2,733 4,058 15,726 2, Source: Company, Nirmal Bang Research Exhibit 12: Key ratios Y/E March FY16 FY17 FY18E FY19E FY20E Per share (Rs) EPS (1.9) Book value Valuation (x) P/E NA P/BV EV/EBITDA NA EV/sales Return ratios (%) RoCE (7.1) RoE (2.2) RoIC (10.7) Profitability ratios (%) EBITDA margin (5.4) EBIT margin (9.0) PAT margin (2.8) Turnover ratios Total asset turnover ratio (x) Debtor days Inventory days Creditor days Source: Company, Nirmal Bang Research 5 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 November 2015 Sell January 2016 Sell February 2016 Sell April 2016 Sell April 2016 Sell May 2016 Sell July 2016 Sell September 2016 Sell October 2016 Sell November 2016 Sell January 2017 Sell February 2017 Sell February 2017 Sell April 2017 Sell May 2017 Sell July 2017 Sell August 2017 Sell October 2017 Sell November 2017 Sell Bharat Heavy Electricals

7 Apr-11 Jun-11 Sep-11 Dec-11 Feb-12 May-12 Aug-12 Nov-12 Jan-13 Apr-13 Jul-13 Sep-13 Dec-13 Mar-14 Jun-14 Aug-14 Nov-14 Feb-15 May-15 Jul-15 Oct-15 Jan-16 Mar-16 Jun-16 Sep-16 Dec-16 Feb-17 May-17 Aug-17 Nov-17 Rating track graph Not Covered Covered 7 Bharat Heavy Electricals

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