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 +91-22-3926 8092 Key Data Current Shares O/S (mn) 2,447.6 Mkt Cap (Rsbn/US$bn) 471.3/7.2 52 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) 36.1 112,990 102,997 (8.8) Raw material costs 34,338 23,752 39,100 13.9 64.6 60,304 62,852 4.2 Staff costs 15,956 14,615 14,816 (7.1) 1.4 31,727 29,432 (7.2) Other expenses 8,231 7,343 10,205 24.0 39.0 15,865 17,548 10.6 Total expenditure 58,525 45,710 64,122 9.6 40.3 107,895 109,832 1.8 EBITDA 2,916 (2,093) (4,742) NA 126.5 5,095 (6,835) NA OPM (%) 4.7 (4.8) (8.0) - - 4.5 (6.6) - Depreciation 2,662 2,425 2,249 (15.5) (7.3) 5,388 4,674 (13.2) Interest costs 126 33 44 (65.4) 34.0 599 76 (87.3) Other income 1,961 4,924 3,733 90.3 (24.2) 5,439 8,657 59.2 PBT 2,088 373 (3,302) NA NA 4,547 (2,929) NA Tax 840 34 (1,253) NA NA 1,364 (1,219) NA Net profit 1,248 339 (2,049) NA NA 3,183 (1,710) NA NPM (%) 2.0 0.8 (3.5) - - 2.8 (1.7) - EPS (Rs) 0.5 0.1 (0.8) NA NA 1.3 (0.7) NA
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 484,247 391,088 301,830 295,662 355,469 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) 27.0 14.1 5.8 3.9 9.7 EPS growth (%) (6.7) (47.7) (59.0) (32.8) 147.7 EBITDA margin (%) 19.4 11.6 8.2 4.0 8.5 P/E (x) 7.1 13.6 33.1 49.3 19.9 P/BV (x) 1.5 1.4 1.4 1.4 1.3 EV/EBITDA (x) 4.3 8.4 15.0 31.3 11.9 Dividend yield (%) 2.8 1.5 0.6 0.9 1.3 RoCE (%) 29.3 10.5 4.0 0.4 5.5 RoE (%) 23.7 10.9 4.3 2.8 6.7 Exhibit 2: Segment-wise snapshot Y/E March 2QFY15 1QFY16 2QFY16 YoY (%) QoQ (%) 1HFY15 1HFY16 YoY (%) Revenue (Rsmn) Power 47,370 33,571 48,543 2.5 44.6 88,811 82,114 (7.5) Industry 15,824 11,436 13,390 (15.4) 17.1 27,154 24,825 (8.6) Revenue mix (%) Power 75.0 74.6 78.4 - - 76.6 76.8 - Industry 25.0 25.4 21.6 - - 23.4 23.2 - EBIT (Rsmn) Power 6,661 2,162 (279) NA NA 11,911 1,883 (84.2) Industry 295 29 (434) NA NA 689 (405) NA EBIT margin (%) Power 14.1 6.4 (0.6) - - 13.4 2.3 - Industry 1.9 0.3 (3.2) - - 2.5 (1.6) - Exhibit 3: Quarterly order book position 300 250 150 100 50 Order intake tapers off 1,800 1, 1, 1, 1,000 800 - 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 54,394 9.2 56,654 4.8 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
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16 Exhibit 5: Annual order inflow trend ( 700 500 300 100 189 362 519 591 590 605 221 315 280 308 220 1,800 1, 1, 1, 1,000 800 - - 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 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: 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
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) 60 50 40 Exhibit 8: Change in our earnings estimates (Rsmn) Old New Deviation (%) Y/E March FY16E FY17E FY16E FY17E FY16E FY17E Revenue 310,825 364,461 295,662 355,469 (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) 800 700 500 30 20 10 Median P/E = 23.8x 300 100 0 0 P/E Median P/E Stock price 4x 8x 12x 16x 20x 24x Source: Bombay Stock Exchange, Nirmal Bang Research 4 Bharat Heavy Electricals
Financial statement Exhibit 10: Income statement Net sales 484,247 391,088 301,830 295,662 355,469 % growth 1.7 (19.2) (22.8) (2.0) 20.2 Raw material costs 273,558 225,188 169,202 177,397 206,172 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 390,349 345,890 276,979 283,836 325,254 EBITDA 93,898 45,198 24,851 11,826 30,215 % growth 2.1 (51.9) (45.0) (52.4) 155.5 EBITDA margin (%) 19.4 11.6 8.2 4.0 8.5 Other income 11,217 16,160 8,340 12,510 15,012 Interest costs 1,253 1,326 917 153 140 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 4 60 101 - - Reported net profit 66,147 34,608 14,193 9,540 23,626 PAT margin (%) 13.7 8.9 4.7 3.2 6.6 EPS (Rs) 27.0 14.1 5.8 3.9 9.7 % growth (6.7) (47.7) (59.0) (32.8) 147.7 Exhibit 12: Balance sheet Share capital 4,895 4,895 4,895 4,895 4,895 Reserves 299,546 325,575 335,951 340,622 357,090 Net worth 304,441 330,471 340,846 345,518 361,985 Short-term loans 12,860 25,500 - - - Long-term loans 1,292 1,048 610 610 610 Total loans 14,152 26,548 610 610 610 Deferred tax liability (net) (15,507) (19,690) (22,207) (22,207) (22,207) Total liabilities 303,086 337,329 319,249 323,920 340,388 Gross block 107,833 120,505 125,888 133,066 138,066 Depreciation 63,248 73,576 84,483 94,841 105,686 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 97,976 101,017 102,874 122,710 Debtors 292,345 280,719 262,235 267,311 311,644 Cash 77,321 118,729 98,127 100,473 111,069 Other current assets 137,883 153,246 150,326 140,784 154,020 Total current assets 625,187 650,670 611,704 611,443 699,443 Creditors 96,752 87,178 87,989 89,914 104,498 Other current liabilities & provisions 285,942 283,715 255,226 243,010 294,114 Total current liabilities 382,694 370,894 343,215 332,924 398,612 Net current assets 242,493 279,776 268,489 278,519 300,831 Total assets 303,086 337,329 319,249 323,920 340,388 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) 90 25 - - Cash from financial activities 6,231 12,486 (25,913) - - Others (298) (534) (597) - - Opening cash balance 67,343 77,321 118,729 98,127 100,473 Closing cash balance 77,321 118,729 98,127 100,473 111,069 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 27.0 14.1 5.8 3.9 9.7 Book value 124.4 135.0 139.3 141.2 147.9 Valuation (x) P/E 7.1 13.6 33.1 49.3 19.9 P/BV 1.5 1.4 1.4 1.4 1.3 EV/EBITDA 4.3 8.4 15.0 31.3 11.9 EV/sales 0.8 1.0 1.2 1.3 1.0 Return ratios (%) RoCE 29.3 10.5 4.0 0.4 5.5 RoE 23.7 10.9 4.3 2.8 6.7 RoIC 39.5 15.0 5.9 0.6 7.9 Profitability ratios (%) EBITDA margin 19.4 11.6 8.2 4.0 8.5 EBIT margin 17.4 9.0 4.7 0.5 5.4 PAT margin 13.7 8.9 4.7 3.2 6.6 Turnover ratios Total asset turnover ratio (x) 1.8 1.2 0.9 0.9 1.1 Debtor days 220 262 317 330 320 Inventory days 89 91 122 127 126 Creditors days 129 141 190 185 185 5 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 12 October 2015 Sell 202 6 Bharat Heavy Electricals
Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s 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, 2014. (Registration No: INH000001436-19.08.2015 to 18.08.2020). 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 Email Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 3926 8017 / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 3926 8230, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 3926 8100/8101, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 3926 8102/8103, +91 22 6636 8830 Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com +91-22-39268226 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-013. Board No. : 91 22 3926 8000/1; Fax. : 022 3926 8010 7 Bharat Heavy Electricals