Change in Estimates Rating Target Bharat Heavy Electricals Ltd Not out of the woods Q3 FY16 Accumulate Sector: Industrials Sector View: Positive Analyst: Tarang Bhanushali research@indiainfoline.com Stock Data Sensex: 22,952 52 Week h/l (Rs): 290 / 119 Market cap (Rscr) : 29,457 6m Avg t/o (Rscr): 79 Bloomberg code: BHEL IB BSE code: 500103 NSE code: BHEL FV (Rs): 2 Div yield (%): 0.2 Prices as on Feb 11, 2016 Shareholding Pattern Jun 15 Sep 15 Dec 15 Promoters 63.1 63.1 63.1 FII+DII 33.5 33.2 33.1 Others 3.5 3.7 3.9 Share Price Trend 120 100 80 60 BHEL Sensex 40 Feb 15 Jun 15 Oct 15 Feb 16 CMP: Rs120 1 yr Target: Rs128 Upside: 6.7% BHEL s results continue to disappoint due to slower execution, lower gross margins and provision for doubtful debtors Topline for the quarter decreased 14.1% yoy to Rs. 5,326cr, quite lower than our and street estimate Gross margins contracted 1,106bps yoy due to lower realisations and higher share of product sourcing through Joint Development projects (JDU). On a qoq basis, gross margins witness marginal increase Margins were further impacted due to provisions worth Rs. 1,088cr and writedown of Rs. 98.2cr. The company reported an OPM of 30.8% against our expectation of 3.2% The company reported quarterly loss for the second consecutive quarter Order inflow for the quarter was robust at Rs. 6,037cr as the company managed to bag two large orders. The company received some orders worth ~Rs. 7,000cr from the end of Q3 FY16. Further BHEL is L1 in 9GW of orders and is targeting another 3 4GW by end FY16 Order book at the end of Q3 FY16 stood at Rs. 109,201cr, higher by 5% yoy, but was lower by 3% qoq due to exclusion of orders worth Rs. 3,646cr Reduce earnings due to slower execution pickup and increase in share of JDU projects; however, post the sharp correction we maintain our Accumulate with a revised price target of Rs. 128. Result table (Rs cr) Q3 FY16 Q3 FY15 % yoy Q2 FY16 % qoq Net sales 5,326 6,198 (14.1) 5,938 (10.3) Material costs (3,449) (3,329) 3.6 (3,910) (11.8) Personnel costs (1,442) (1,362) 5.9 (1,482) (2.6) Other overheads (2,072) (1,213) 70.9 (1,021) 103.1 Operating profit (1,639) 294 (657.8) (474) 245.6 OPM (%) (30.8) 4.7 3551 bps (8.0) 2279 bps Depreciation (225) (256) (12.1) (225) 0.2 Interest (5) (5) (4) 19.7 Other income 171 274 (37.8) 373 (54.3) PBT (1,699) 306 (330) Tax 597 (94) 125 Effective tax rate (%) 35.1 30.6 37.9 Adjusted PAT (1,102) 213 (205) Adj. PAT margin (%) (20.7) 3.4 2412 bps (3.5) 1724 bps Reported PAT (1,102) 213 (205) Ann. EPS (Rs) (3.6) 0.7 (0.7) February 12, 2016 Result Update This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices, estimates and views on sectors and markets (Read the complete disclaimer at the back of this report)
Bharat Heavy Electricals Ltd (Q3 FY16) Execution yet to pickup Execution pickup continued to lag order inflow growth and revenues remained under pressure in Q3 FY16. The company for the 13 th consecutive quarter reported a decline in topline on account of higher share of slow moving orders in over all order book and slower clearances at customer end. Topline during the quarter was lower by 14.1% yoy at Rs. 5,326cr, quite lower than our estimate. The company described the delay in dispatches due to customer end issues related to land availability and tightening liquidity. The management also mentioned that since orders received over the last six months are at an early stage, revenue recognition was quite lower in H1 FY16. On a segmental basis, revenue for the power division was lower by 9.5% yoy and accounted for 79% of overall revenues. Industrial segment remained impacted by slower revival in private sector capex and lower order book. The company expects revenue growth to resume from FY17 on the back of pickup in execution and execution of orders won over the last one year. Revenue from the Telangana order would come with a delay by H2 FY17 as the project doesn t have Environment Clearance. As per the management, the genco is in advanced stages of getting the environmental clearance for the project. BHEL is closely working with the Telangana genco for this project and expects execution to pickup from FY17. We have lowered our FY16 growth estimate on account of slower than expected execution. Order inflow strong at Rs. 35,000cr YTD FY16 Post a weak Q2 FY16, BHEL managed to register strong order inflows to the tune of Rs. 13,000cr. Order inflow during the quarter stood at Rs. 6,037cr, marginally higher than our estimate. The company received 2 orders worth Rs. 4,614cr on a nomination basis from APGENCO. The order involves setting up two supercritical thermal power projects involving one unit each of 800 MW sets. Further the company received orders worth Rs. 7,000cr, taking total order inflow YTD at Rs. 35,000cr. BHEL won an order for the supply of 2x800MW Steam Generators (Boilers) with supercritical parameters. Valued at ~Rs. 3,500cr, the plant is located within NTPC s existing Ramagundam Power Station in Karimnagar district of Telangana. Order book at the end of Q3 FY16 stood at Rs. 109,201cr, higher by 5% yoy, but was lower by 3% qoq due to exclusion of orders worth Rs. 3,646cr. The company has excluded orders these orders wherein it feels that the project would not start. Further BHEL is L1 in 9GW of orders. It is targeting another 3 4GW by end FY16. The share of slow moving orders decreased during the quarter to Rs. 32,600cr as the company has been able to revive five projects. BHEL has revived & started 2x270MW GVK Govindval, 5x270MW Rattan India Nasik Ph 1, 1x600MW Jabua Power, 1x370MW Yelankha, 5x121.5MW Pranhita (package 8), 4x121.5 Pranhita (package 11). Management is hopeful that slow moving orders would see some revival in execution post the reforms for State DISCOMS. The company expects ordering to be quite strong from State Utilities over the rest of the year. Order book remains flat yoy 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 (Rs cr) Order book Order inflow (Rs cr) 25,000 20,000 15,000 10,000 5,000 0 (5,000) (10,000) Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Page 2 of 6
Bharat Heavy Electricals Ltd (Q3 FY16) Gross margins contract sharply BHEL during the quarter registered an operating loss of Rs. 1,639cr on account of higher raw material costs, lower execution and an increase in provisions. Margins during the quarter stood at 30.8% against 4.7% in Q3 FY15 and 8% in Q2 FY16. Gross margins contracted 1106bps yoy to 35.2% against 46.3% in Q3 FY15 and 34.2% in Q2 FY16. The management indicated that this was on account of lower realisations and higher share of product sourcing through Joint Development projects (JDU). Under the JDU the company has to source certain parts from its partners, leading to an increase in share of imported products. Sourcing under the JDU would be higher than 15 20% of the project. Margins were also under pressure due to an increase in provisioning included in other expenditure. Net provisions made during the quarter stood at Rs. 1,186cr, which included provisioning doubtful debts at Rs. 1,088cr, and Rs. 98.2cr towards WIP/FG inventory value. Share of other expenditure increased from 19.6% in Q3 FY15 to 38.9% in Q2 FY16. On a segmental basis, the decline in margins remained high for both the segments. EBIT margins for the power sector stood at 26.5% and that for industry segment stood at 8.4%. We believe that margins are expected to remain under pressure due to the increased competitive intensity in BTG, higher share of JDU order execution and decline in short term orders in industrial segment. Cost Analysis As a % of net sales Q3 FY16 Q3 FY15 bps yoy Q2 FY16 bps qoq Material costs 64.8 53.7 1,106 65.8 (108) Personnel Costs 27.1 22.0 511 25.0 213 Other overheads 38.9 19.6 1,935 17.2 2,173 Total costs 130.8 95.3 3,551 108.0 2,279 Segmental results (Standalone) Y/e 31 Mar (Rs cr) Q3 FY16 Q3 FY15 % yoy Q2 FY16 % qoq Sales (Rs cr) Power 4,402 4,862 (9.5) 4,854 (9.3) Industry 1,151 1,493 (22.9) 1,339 (14.1) Total 5,553 6,355 (12.6) 6,193 (10.3) EBIT (Rs cr) Power (1,166) 459 (354.1) (28) 4,074.8 Industry (97) 6 (1,609.8) (43) 124.0 Total (1,263) 465 (371.5) (71) 1,670.4 EBIT margins (%) in bps in bps Power (26.5) 9.4 (3,591) 0.6 (2,590) Industry (8.4) 0.4 (888) 3.2 (521) Total (22.7) 7.3 (3,006) 1.2 (2,159) Page 3 of 6
Bharat Heavy Electricals Ltd (Q3 FY16) Business headwinds to keep earnings under pressure The management during the concall remained bullish in its order inflow guidance for the next one year. The company has already bagged order for 7.6GW and it is also favorably placed in orders for 9GW. The company has already bid for ~15GW of orders and expects the same to be announced over the next one year. It expects that ordering would largely be done by state utilities. However, it mentioned that pricing pressure still persists in the system due to excess manufacturing capacity and lower opportunities. The company expects execution to pick up only from FY17 as orders won over the last one year would be executed. To offset the weak execution, the company is looking at increasing its share in the domestic defence and railway segment. However, it guided that the pressure on margins would persist going forward due to lower realisations and higher share of JDU orders of overall order execution. Since more than 50% of the orders under execution are Supercritical orders, gross margins would be under pressure. We have downgraded our margin estimates for FY16 and FY17 factoring the higher share of JDU orders. We have also lowered our revenue estimate for FY16 due to miss in revenues in 9M and slower than expected revival in the power sector. We maintain our Accumulate rating with a revised price target of Rs. 128. Financial summary Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E Revenues 30,183 28,082 34,321 42,396 yoy growth (%) (22.8) (7.0) 22.2 23.5 Operating profit 2,485 (1,602) 1,006 2,848 OPM (%) 8.2 (5.7) 2.9 6.7 Pre exceptional PAT 1,429 (840) 775 2,050 Reported PAT 1,429 (840) 775 2,050 yoy growth (%) (57.6) 164.5 EPS (Rs) 5.8 3.4 3.2 8.4 P/E (x) 20.5 37.9 14.3 Price/Book (x) 0.9 0.9 0.9 0.8 EV/EBITDA (x) 7.9 (11.2) 19.4 7.6 Debt/Equity (x) 0.0 0.0 0.0 0.0 RoE (%) 4.3 (2.5) 2.3 5.9 RoCE (%) 6.4 (4.1) 3.4 8.7 Page 4 of 6
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