Bharat Heavy Electricals

4QFY16 Result Update Bharat Heavy Electricals 30 May 2016 Reuters: BHEL.BO; Bloomberg: BHEL IN Structural Headwinds Persist; Retain Sell Bharat Heavy Electricals (BHEL) posted 4QFY16 revenues of Rs100bn, down 21% YoY but in line with our estimate, affected by weak opening order book. FY16 revenues fell 15% YoY to Rs256bn. BHEL posted a 19% revenue CAGR decline over FY13-FY16 owing to reduced thermal power capex in domestic market. EBITDA fell 78% YoY to Rs3.6bn in 4QFY16, translating to an operating margin of 3.6%, down 960bps YoY. PAT fell 59% YoY to Rs3.6bn, 9% below our estimate. For FY16, BHEL posted EBITDA loss of Rs19.6bn, with a negative 7.6% operating margin and a net loss of Rs9.1bn. Order backlog remains weak at Rs1,107bn, excluding orders worth Rs74.3bn for projects which are unlikely to commence. Execution will continue to remain a challenge as projects worth Rs500bn, forming 45% of current order book, are non/slow-moving. We remain negative on BHEL considering the unfavourable demand-supply dynamics of thermal BTG industry in India. We have retained Sell rating on BHEL with a target price of Rs105 based on 18xFY18E earnings (25% discount to the past 10 years median P/E of 24x). Order inflow position: BHEL reported order inflow of Rs156bn in 4QFY16 led by Rs56bn Uppur project (2x800MW BTG order), Rs35bn Karimnagar project (2x800MW boiler order) and Rs28bn North Chennai project (1x800MW BTG order). FY16 order inflow stood at Rs437bn, up 42% YoY on a low base (refer Exhibit 5). BHEL has L1 status in projects worth 12GW, of which it expects projects worth 7GW (worth Rs200bn) to be awarded in FY17E. Key L1 contracts include NTPC Barethi (4x660MW), Bhusaval (1x660MW), Pudimadaka (4x1000MW turbines) and NTPC Bangladesh (2x660MW). Orders for 12GW thermal power plants were finalised in FY16, while the management expects project finalisation of 12GW in FY17 as well. We are factoring in order inflow worth Rs450bn each in FY17 and FY18. Order backlog remains weak: Order backlog remains weak at Rs1,107bn, flat on QoQ basis. Orders worth Rs74.3bn have been excluded from the order book in FY16 (Rs37.8bn in 4QFY16) as these projects are unlikely to commence. Execution traction is likely to remain weak as 45% of the order book is non/slow-moving amounting to projects worth Rs500bn (of which three projects - Ennore (Rs78bn), Yedadri (Rs179bn) and Manuguru (Rs50bn) - account for a major share). Working capital remains stretched: Compared to a 15% YoY decline in revenues, ex-cash net working capital fell by only 6% YoY in FY16. As a percentage of sales, ex-cash net working capital further elongated from 54.8% in FY15 to 60.5% in FY16 as debtor days increased from 316 to 348 YoY while inventory days rose from 122 to 137 YoY. 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 of the industry (35GW). With insufficient order placement activity in the industry, 4% RoE and 2% RoCE in FY18E 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), continuation of large project award 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: Rs128 Target Price: Rs105 Downside: 18% Chirag Muchhala chirag.muchhala@nirmalbang.com +91-22-3926 8092 Key Data Current Shares O/S (mn) 2,447.6 Mkt Cap (Rsbn/US$bn) 313.5/4.7 52 Wk H / L (Rs) 290/90 Daily Vol. (3M NSE Avg.) 9,328,516 Price Performance (%) 1 M 6 M 1 Yr BHEL 0.3 (27.2) (48.7) Nifty Index 2.2 2.7 (2.1) Source: Bloomberg Y/E March standalone (Rsmn) 4QFY15 3QFY16 4QFY16 YoY (%) QoQ (%) FY15 FY16 YoY (%) Net revenues 127,452 53,256 100,048 (21.5) 87.9 302,421 256,300 (15.3) Raw material costs 75,606 34,494 64,050 (15.3) 85.7 169,202 161,397 (4.6) Staff costs 9,152 14,424 11,556 26.3 (19.9) 54,500 55,412 1.7 Other expenses 25,876 20,725 20,804 (19.6) 0.4 53,868 59,076 9.7 Total expenditure 110,634 69,643 96,410 (12.9) 38.4 277,570 275,885 (0.6) EBITDA 16,818 (16,387) 3,638 (78.4) NA 24,851 (19,585) NA OPM (%) 13.2 (30.8) 3.6 - - 8.2 (7.6) - Depreciation 2,821 2,255 2,428 (13.9) 7.7 10,773 9,356 (13.2) Interest costs 265 52 140 (47.4) 166.9 917 268 (70.8) Other income 160 1,706 4,139 2,483.5 142.7 8,340 14,501 73.9 PBT 13,892 (16,989) 5,209 (62.5) NA 21,501 (14,708) NA Tax 4,907 (5,969) 1,555 (68.3) NA 7,207 (5,633) NA Prior-period items (101) - (59) - - (101) (59) - Net profit 8,884 (11,020) 3,596 (59.5) NA 14,193 (9,134) NA NPM (%) 7.0 (20.7) 3.6 - - 4.7 (3.6) - EPS (Rs) 3.6 (4.5) 1.5 (59.5) NA 5.8 (3.7) NA Source: Company, Nirmal Bang Research

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 Exhibit 1: Financial summary Net revenues 391,088 302,421 256,300 285,755 331,707 EBITDA 45,198 24,851 (19,585) 5,715 15,922 Net profit 34,608 14,193 (9,134) 6,293 14,316 EPS (Rs) 14.1 5.8 (3.7) 2.6 5.8 EPS growth (%) (47.7) (59.0) NA NA 127.5 EBITDA margin (%) 11.6 8.2 (7.6) 2.0 4.8 P/E (x) 9.1 22.1 NA 49.8 21.9 P/BV (x) 0.9 0.9 0.9 0.9 0.9 EV/EBITDA (x) 4.9 8.7 (10.9) 38.3 13.5 Dividend yield (%) 2.2 0.9 0.3 0.4 0.9 RoCE (%) 10.5 4.0 (8.6) (1.2) 1.7 RoE (%) 10.9 4.3 (2.7) 1.9 4.2 Source: Company, Nirmal Bang Research Exhibit 2: Segment-wise snapshot Y/E March 4QFY15 3QFY16 4QFY16 YoY (%) QoQ (%) FY15 FY16 YoY (%) Revenues (Rsmn) Power 102,401 44,021 81,012 (20.9) 84.0 239,835 207,147 (13.6) Industry 27,550 11,508 22,385 (18.7) 94.5 69,635 58,718 (15.7) Revenue mix (%) Power 78.8 79.3 78.4 - - 77.5 77.9 - Industry 21.2 20.7 21.6 - - 22.5 22.1 - EBIT (Rsmn) Power 13,119 (11,656) 9,496 (27.6) NA 29,617 (277) NA Industry 2,664 (972) (974) NA NA 3,417 (2,352) NA EBIT margin (%) Power 12.8 (26.5) 11.7 - - 12.3 (0.1) - Industry 9.7 (8.4) (4.4) - - 4.9 (4.0) - Source: Company, Nirmal Bang Research Exhibit 3: Quarterly order book position 300 250 200 150 100 50 Order intake tapers off 1,800 1,600 1,400 1,200 1,000 800 600-400 Order intake (LHS) Order backlog (RHS) Source: Company, Nirmal Bang Research Exhibit 4: Actual performance versus our estimates, Bloomberg consensus estimates 4QFY16 (Rsmn) Actual Our estimate Deviation (%) Bloomberg cons. est. Deviation (%) Revenues 100,048 100,082-107,860 (7.2) EBITDA 3,638 6,255 (41.8) 6,344 (42.7) PAT 3,596 3,960 (9.2) 3,073 17.0 Source: Company, Bloomberg, Nirmal Bang Research 2 Bharat Heavy Electricals

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Exhibit 5: Annual order inflow trend ( 700 600 500 400 300 200 100 189 362 519 591 590 605 221 315 280 308 437 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - - Order intake (LHS) Order backlog (RHS) Source: Company, Nirmal Bang Research Exhibit 6: Key BTG projects awarded over the past two years in India Project Developer Winner Value Unit size (MW) Scope Rourkela NSPCL BHEL 16.0 1x250 EPC Uppur TANGEDCO BHEL 56.0 2x800 BTG Tuticorin SPIC Electric BHEL 12.0 1x525 BTG Karimnagar NTPC BHEL 35.0 2x800 Boiler North Chennai TANGEDCO BHEL 27.6 1x800 BTG Barh 1 NTPC Doosan 20.0 3x660 Boiler Vijaywada* APGENCO BHEL 23.1 1x800 BTG Krishnapatnam* APGENCO BHEL 23.1 1x800 BTG Harduaganj UPRVUNL Toshiba - JSW 35.0 1x660 EPC Yadadri* TSGENCO BHEL 179.5 5x800 EPC Khargone NTPC L&T 55.8 2x660 EPC Manuguru* TSGENCO BHEL 50.0 4x270 EPC Kothagudem* TSGENCO BHEL 38.1 1x800 EPC Yelahanka KPCL BHEL 12.0 1x370 EPC Wanakbori GSECL BHEL 35.4 1x800 EPC Ennore SEZ TNEB BHEL 78.0 2x660 EPC + extended BoP Shree Singaji MPGENCO L&T 51.0 2x660 EPC Tanda NTPC L&T 18.9 2x660 Boiler Tanda NTPC Bharat Forge - Alstom 11.4 2x660 TG Ennore TNEB Lanco Infratech 39.6 1x660 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 7: Upcoming projects for bidding Project State Developer Unit size (MW) Scope Pudimadaka Andhra Pradesh NTPC 4x1000 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# Jammu & Kashmir NHPC 4x250 EPC Note: # BHEL has L1 status; Source: Industry, Nirmal Bang Research 3 Bharat Heavy Electricals

Financial statement Exhibit 8: Income statement Net sales 391,088 302,421 256,300 285,755 331,707 % growth (19.2) (22.7) (15.3) 11.5 16.1 Raw material costs 225,188 169,202 161,397 174,310 200,683 Staff costs 59,338 54,500 55,412 57,151 63,024 Other overheads 61,364 53,868 59,076 48,578 52,078 Total expenditure 345,890 277,570 275,885 280,040 315,785 EBITDA 45,198 24,851 (19,585) 5,715 15,922 % growth (51.9) (45.0) NA NA 178.6 EBITDA margin (%) 11.6 8.2 (7.6) 2.0 4.8 Other income 16,160 8,340 14,501 13,051 14,356 Interest costs 1,326 917 268 290 303 Depreciation 9,829 10,773 9,356 9,736 10,091 Profit before tax 50,203 21,501 (14,708) 8,740 19,884 Tax 15,535 7,207 (5,633) 2,447 5,568 Net profit 34,668 14,294 (9,075) 6,293 14,316 Prior-period expenses 60 101 59 - - Reported net profit 34,608 14,193 (9,134) 6,293 14,316 PAT margin (%) 8.9 4.7 (3.5) 2.2 4.3 EPS (Rs) 14.1 5.8 (3.7) 2.6 5.8 % growth (47.7) (59.0) NA NA 127.5 Source: Company, Nirmal Bang Research Exhibit 10: Balance sheet Share capital 4,895 4,895 4,895 4,895 4,895 Reserves 325,575 335,951 325,638 330,499 341,379 Net worth 330,471 340,846 330,533 335,394 346,274 Short-term loans 25,500 - - - - Long-term loans 1,048 610 1,263 1,263 1,263 Total loans 26,548 610 1,263 1,263 1,263 Deferred tax liability (net) (19,690) (22,207) (31,348) (31,348) (31,348) Total liabilities 337,329 319,249 300,448 305,309 316,189 Gross block 120,505 125,888 134,625 139,625 144,625 Depreciation 73,576 84,483 93,839 103,574 113,665 Net block 46,929 41,405 40,786 36,050 30,959 Capital work in progress 6,421 5,178 2,000 2,000 2,000 Investments 4,202 4,177 6,634 6,634 6,634 Inventories 97,976 101,051 96,374 105,690 120,869 Debtors 280,719 262,235 244,290 270,097 311,714 Cash 118,729 98,127 100,860 95,858 99,391 Other current assets 153,246 150,292 144,609 143,895 154,630 Total current assets 650,670 611,705 586,133 615,540 686,604 Creditors 87,178 87,990 87,021 92,647 105,565 Other current liabilities & provisions 283,715 255,226 248,084 262,268 304,444 Total current liabilities 370,894 343,216 335,105 354,915 410,009 Net current assets 279,776 268,489 251,028 260,625 276,596 Total assets 337,329 319,249 300,448 305,309 316,189 Source: Company, Nirmal Bang Research Exhibit 3: Exhibit 9: Cash flow EBIT 35,369 14,078 (28,941) (4,021) 5,831 (Inc.)/dec. in working capital 4,125 (9,315) 20,194 (14,599) (12,437) Cash flow from operations 39,494 4,763 (8,747) (18,620) (6,606) Other income 16,160 8,340 14,501 13,051 14,356 Depreciation 9,829 10,773 9,356 9,736 10,091 Tax paid (-) (19,718) (9,725) (3,508) (2,447) (5,568) Net cash from operations 45,765 14,151 11,602 1,720 12,273 Capital expenditure (-) (6,879) (4,006) (5,559) (5,000) (5,000) Net cash after capex 38,887 10,146 6,044 (3,280) 7,273 Interest paid (-) (1,326) (917) (268) (290) (303) Dividends paid (-) (8,104) (3,322) (1,145) (1,432) (3,436) Inc./(dec.) in short-term borrowing 12,640 (25,500) - - - Inc./(dec.) in long-term borrowing (244) (438) 653 - - Inc./(dec.) in total borrowings 12,396 (25,938) 653 - - (Inc.)/dec. in investments 90 25 (2,457) - - Cash from financial activities 3,056 (30,152) (3,218) (1,722) (3,740) Others (534) (596) (93) - - Opening cash balance 77,321 118,729 98,127 100,860 95,858 Closing cash balance 118,729 98,127 100,860 95,858 99,391 Change in cash balance 41,408 (20,602) 2,733 (5,002) 3,533 Source: Company, Nirmal Bang Research Exhibit 4: Exhibit 11: Key ratios Y/E March FY14 FY15 FY16 FY17E FY18E Per share (Rs) EPS 14.1 5.8 (3.7) 2.6 5.8 Book value 135.0 139.3 135.0 137.0 141.5 Valuation (x) P/E 9.1 22.1 NA 49.8 21.9 P/BV 0.9 0.9 0.9 0.9 0.9 EV/EBITDA 4.9 8.7 (10.9) 38.3 13.5 EV/sales 0.6 0.7 0.8 0.8 0.6 Return ratios (%) RoCE 10.5 4.0 (8.6) (1.2) 1.7 RoE 10.9 4.3 (2.7) 1.9 4.2 RoIC 15.0 5.9 (12.5) (1.8) 2.5 Profitability ratios (%) EBITDA margin 11.6 8.2 (7.6) 2.0 4.8 EBIT margin 9.0 4.7 (11.3) (1.4) 1.8 PAT margin 8.9 4.7 (3.5) 2.2 4.3 Turnover ratios Total asset turnover ratio (x) 1.2 0.9 0.8 0.9 1.1 Debtor days 262 316 348 345 343 Inventory days 91 122 137 135 133 Creditor days 141 190 197 194 192 Source: Company, Nirmal Bang Research 4 Bharat Heavy Electricals

Rating track Date Rating Market price (Rs) Target price (Rs) 27 January 2012 Buy 281 327 30 January 2012 Buy 274 327 4 April 2012 Hold 264 286 13 April 2012 Hold 257 286 24 May 2012 Hold 209 221 27 July 2012 Hold 212 221 20 September 2012 Hold 216 221 4 October 2012 Sell 249 221 30 October 2012 Sell 227 221 7 January 2013 Sell 242 221 4 February 2013 Sell 225 215 26 March 2013 Sell 180 170 8 April 2013 Sell 183 170 9 April 2013 Sell 182 170 24 May 2013 Sell 196 165 9 July 2013 Sell 183 165 5 August 2013 Sell 150 130 7 October 2013 Sell 144 130 7 November 2013 Sell 140 113 7 January 2014 Sell 164 113 6 February 2014 Sell 161 107 7 April 2014 Sell 184 107 11 April 2014 Sell 186 107 2 June 2014 Sell 242 168 10 July 2014 Sell 243 168 13 August 2014 Sell 224 160 9 October 2014 Sell 219 160 17 November 2014 Sell 246 190 29 December 2014 Sell 251 190 9 January 2015 Sell 257 190 13 February 2015 Sell 268 202 7 April 2015 Sell 235 202 15 April 2015 Sell 242 202 27 May 2015 Sell 241 205 8 July 2015 Sell 259 205 10 August 2015 Sell 266 200 12 October 2015 Sell 202 200 9 November 2015 Sell 192 174 8 January 2016 Sell 164 174 12 February 2016 Sell 120 105 8 April 2016 Sell 119 105 12 April 2016 Sell 127 105 30 May 2016 Sell 128 105 5 Bharat Heavy Electricals

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