BHEL (BHEL IN) Elevated provisions and taxes led to the disappointment

INSTITUTIONAL EQUITY RESEARCH BHEL (BHEL IN) Elevated provisions and taxes led to the disappointment INDIA CAPITAL GOODS Quarterly Update 30 May 2018 Top takeaways from 4QFY18 BHEL s recurring profit (Rs 3.3bn, 56% yoy) was significantly below our and consensus estimates on lower than expected revenues and higher tax rate. Order inflows (Rs 252bn, +51% yoy) were driven by award of delayed orders for Patratu TPP (Rs 117bn), Panki TPP (Rs 44bn), and Bhusawal TPP (Rs 28bn). Order book (Rs 1.18tn; 12% yoy) implies a book to bill of 4x FY18 sales. Receivables remain elevated at 451 days (410 in 4Q17). Net working capital at 175 days was flat yoy due to lower inventory (79 vs. 94 days) and higher payables (141 vs. 120). Key highlights: Revenues (Rs 101bn, +4% yoy) were 7%/4% below our/consensus estimates. EBITDA (Rs 10.4bn, 16% yoy) was below our estimates because of a 250bps yoy contraction in EBITDA margins (10.2% vs. 12.7%) on elevated provisioning. Higher provisioning for contractual obligations/doubtful receivables negated the benefits of improved gross margins (49.4% vs. 45.7%). Effective tax rate has increased significantly because of higher deferred tax on withdrawal of benefits on non eligible expenses under IND AS. Segmentally, Power revenue (85% of sales) grew 3% yoy while Industry revenue fell 14%. Profitability was weak across segments, with a 300bps contraction in Power margins (10.9% vs. 13.9%) and a sharp contraction in Industry margins (3.8% vs. 15.2%). BHEL reviewed its cost allocation policy, leading to lower segmental margins and reduction in unallocated expenses. Conference call takeaways Executable order book further improved to Rs 986bn (84% vs. 79% in 3QFY18). BHEL has won Rs 18bn of new orders YTD FY19 and is well placed in Rs 160bn of orders, including Talcher (Rs 63bn), Singareni (Rs 58bn), and FGD projects (Rs 24bn). In addition, 10 11GW of projects are tendered, and it expects 7 8GW projects award in FY19. BHEL s MOU with the government for FY19 suggests a revenue target of Rs 320bn (excellent rating) implying 11% yoy. BHEL does not see a material negative impact of higher commodity prices on its FY19 profitability as it has already procured most of its requirement and has the advantage of bulk procurement of equipment for similar rating plants. It expects to unwind its earlier provisions for contractual obligations over the next two years on completion of major projects. It released Rs 6bn in FY18 itself. Receivables from the private sector were Rs 55bn (16% of overall receivables) with Lalitpur TPP (Bajaj Energy), Bara (JP Power), and Vizag (Hinduja) being major accounts. Visibility on any potential write off/provision on these projects will only emerge in FY20. Outlook and valuation With further improvement in the share of executable orders, visibility on FY19 20 revenues has materially improved, though visibility on margins is still hazy. We cut our FY19 20 earnings estimates by 23% as we lower our margin estimates and factor in a higher tax rate. Consequently, we revise our target price to Rs 85 (Rs 103 earlier) based on 15x FY20 PE. We maintain our Neutral rating, as we find it difficult to justify current valuations (15x FY20 PE) for single digit RoEs and no material business diversification. Key monitorable: margins. Page 1 PHILLIPCAPITAL INDIA RESEARCH Neutral (Maintain) CMP RS 83 / TARGET RS 85 (+2%) COMPANY DATA O/S SHARES (MN) : 3671 MARKET CAP (RSBN) : 275 MARKET CAP (USDBN) : 4.1 52 WK HI/LO (RS) : 108 / 74 LIQUIDITY 3M (USDMN) : 7.5 PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Mar 18 Dec 17 Sep 17 PROMOTERS : 63.1 63.1 63.1 FII / NRI : 13.0 13.1 14.3 FI / MF : 18.5 18.2 17.3 NON PRO : 0.5 0.6 0.5 PUBLIC & OTHERS : 4.9 5.1 4.9 KEY FINANCIALS Rs mn FY18 FY19E FY20E Net Sales 2,88,130 3,32,154 3,73,403 EBIDTA 14,129 27,424 34,512 Net Profit 4,686 16,229 20,683 EPS, Rs 1.3 4.4 5.6 PER, x 65.4 18.9 14.8 EV/EBIDTA, x 13.8 6.7 4.9 P/BV, x 0.9 0.9 0.9 ROE, % 1.4 4.9 6.0 Debt/Equity (%) 0.4 0.4 0.4 CHANGE IN ESTIMATES Revised Est. % Revision Rs bn FY19E FY20E FY19E FY20E Revenue 332.15 373.40 0.5% 3.1% EBITDA 27.42 34.51 11.1% 11.0% Core PAT 16.23 20.68 22.5% 23.2% EPS (Rs) 4.4 5.6 22.5% 23.2% Jonas Bhutta (+ 9122 6246 4119) jbhutta@phillipcapital.in Vikram Rawat (+ 9122 6246 4120) vrawat@phillipcapital.in (Rs mn) Q4FY18 Q4FY17 Change yoy vs. expectations Comments Order book 11,81,360 10,52,000 12.3% 4% Order inflows 2,51,820 1,66,610 51.1% 11% Driven by award of delayed orders Sales 1,01,437 97,795 3.7% 7% Due to weak Industrial and muted Power segment revenues Gross margin (%) 49.4% 45.7% 378 bps 647 bps Change in sales mix (lower JDU projects) EBITDA 10,396 12,427 16.3% 27% Impacted by elevated provisioning EBITDA margin (%) 10.2% 12.7% 246 bps 292 bps Recurring PAT 3,324 7,480 55.6% 64% Impacted by higher deferred taxes Reported PAT 4,572 2,156 112.1% 50% On low base due to one off provision for gratuity & leave pay in 4Q17 Recurring EPS (Rs) 0.9 2.0 55.6% 64%

BHEL: Quarterly results Rs mn Q4FY18 Q4FY17 Change yoy Sales 1,01,437 97,795 3.7% Raw material 51,289 53,143 3.5% % of sales 51% 54% 378 bps Gross profit 50,148 44,652 12.3% Gross margin (%) 49.4% 45.7% 378 bps Employee cost 18,805 10,847 73.4% % of sales 19% 11% 745 bps Other expenses 20,947 21,378 2.0% % of sales 21% 22% 121 bps EBITDA 10,396 12,427 16.3% EBITDA margin (%) 10.2% 12.7% 246 bps Depreciation 2,171 2,139 1.5% EBIT 8,225 10,288 20.0% EBIT margin (%) 8% 11% 241 bps Interest 726 3,136 76.9% Other Income 1,979 2,274 13.0% PBT 9,479 9,426 0.6% Tax 6,155 1,946 216.3% Effective Tax rate (%) 64.9% 20.6% 4429 bps Recurring PAT 3,324 7,480 55.6% Recurring PAT margin (%) 3.3% 7.6% 437 bps Exceptional 1,248 (5,325) 123.4% Reported PAT 4,572 2,156 112.1% Recurring EPS (Rs) 0.9 2.0 55.6% Source: Company, PhillipCapital India Research BHEL: Segmental results Rs mn Q4FY18 Q4FY17 Change yoy Segment Revenue Power 83,081 81,090 2.5% Industrial 15,205 17,653 13.9% Gross Sales 98,286 98,743 0.5% Excise & service tax (4,694) 100.0% Other operating income 3,151 3,745 15.9% Total Operating Income 1,01,437 97,795 3.7% Segment EBIT Power 9,094 11,291 19.5% Industrial 572 2,683 78.7% Segment EBIT 9,666 13,973 30.8% Unallocated (1,440) (3,686) 60.9% EBIT as per P&L 8,225 10,288 20.0% EBIT margin (%) Power 10.9% 13.9% 298 bps Industrial 3.8% 15.2% 1144 bps Segment EBIT 9.8% 14.2% 432 bps Unallocated % of Total operating income 1.4% 3.8% 235 bps EBIT margin 8.1% 10.5% 241 bps Source: Company, PhillipCapital India Research Estimates Page 2 PHILLIPCAPITAL INDIA RESEARCH

Financials Income Statement Y/E Mar, Rs mn FY17 FY18 FY19e FY20e Net sales 2,85,995 2,88,130 3,32,154 3,73,403 Growth, % 11 1 15 12 Other income 0 0 0 0 Total income 2,85,995 2,88,130 3,32,154 3,73,403 Raw material expenses 1,71,100 1,61,435 1,87,762 2,12,946 Employee expenses 53,946 60,265 63,589 62,921 Other Operating expenses 40,898 52,302 53,380 63,024 EBITDA (Core) 20,051 14,129 27,424 34,512 Growth, % (246.7) (29.5) 94.1 25.8 Margin, % 7.0 4.9 8.3 9.2 Depreciation 8,488 7,864 8,010 8,548 EBIT 11,562 6,265 19,414 25,964 Growth, % (150.2) (45.8) 209.9 33.7 Margin, % 4.0 2.2 5.8 7.0 Interest paid 3,506 2,546 2,449 2,663 Other Non Operating Income 7,659 6,931 7,625 8,035 Pre tax profit 15,715 10,650 24,590 31,337 Tax provided 4,437 5,964 8,361 10,655 Net Profit 11,278 4,686 16,229 20,683 Growth, % (200.9) (58.4) 246.3 27.4 Net Profit (adjusted) 11,278 4,686 16,229 20,683 Unadj. shares (m) 3,671 3,671 3,671 3,671 Wtd avg shares (m) 3,671 3,671 3,671 3,671 Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19e FY20e Cash & bank 1,04,918 1,12,912 1,24,368 1,39,463 Debtors 3,18,633 3,54,935 3,73,105 3,83,633 Inventory 73,724 62,588 72,794 82,558 Loans & advances 0 0 0 0 Other current assets 32,357 31,575 36,324 40,714 Total current assets 5,29,632 5,62,009 6,06,592 6,46,367 Investments 6,614 6,907 6,907 6,907 Gross fixed assets 53,725 56,318 60,188 64,149 Less: Depreciation 17,766 25,630 33,640 42,188 Add: Capital WIP 1,683 2,028 1,658 1,697 Net fixed assets 37,642 32,716 28,206 23,658 Total assets 6,12,302 6,37,892 6,77,964 7,13,192 Current liabilities 1,95,870 2,23,587 2,40,296 2,52,178 Provisions 91,929 87,059 98,700 1,07,223 Total current liabilities 2,87,799 3,10,646 3,38,996 3,59,401 Non current liabilities 1,558 1,235 1,235 1,235 Total liabilities 2,89,358 3,11,881 3,40,231 3,60,636 Paid up capital 4,895 7,343 7,343 7,343 Reserves & surplus 3,18,049 3,18,668 3,30,390 3,45,213 Shareholders equity 3,22,944 3,26,011 3,37,733 3,52,556 Total equity & liabilities 6,12,302 6,37,892 6,77,964 7,13,192 Cash Flow Y/E Mar, Rs mn FY17 FY18 FY19e FY20e Pre tax profit 15,715 10,650 24,590 31,337 Depreciation 8,488 7,864 8,010 8,548 Chg in working capital 101 1,537 4,776 4,276 Total tax paid 6,259 3,809 8,361 10,655 Cash flow from operating activities 5,620 8,783 14,287 19,582 Capital expenditure 3,327 2,938 3,500 4,000 Chg in investments 27 293 0 0 Cash flow from investing activities 3,136 7,080 4,125 4,035 Free cash flow 8,757 15,863 18,412 23,617 Debt raised/(repaid) 544 324 0 0 Dividend (incl. tax) 4,655 8,042 5,860 8,712 Cash flow from financing activities 4,699 7,869 6,956 8,522 Net chg in cash 4,058 7,994 11,456 15,095 Valuation Ratios FY17 FY18 FY19e FY20e Per Share data EPS (INR) 3.1 1.3 4.4 5.6 Growth, % (200.9) (58.4) 246.3 27.4 Book NAV/share (INR) 88.0 88.8 92.0 96.0 FDEPS (INR) 3.1 1.3 4.4 5.6 CEPS (INR) 5.4 3.4 6.6 8.0 CFPS (INR) 4.7 3.3 5.0 6.5 DPS (INR) 1.1 1.8 1.3 2.0 Return ratios Return on assets (%) 2.1 1.0 2.7 3.2 Return on equity (%) 3.5 1.4 4.9 6.0 Return on capital employed (%) 4.8 2.0 6.0 7.2 Turnover ratios Asset turnover (x) 1.0 1.1 1.3 1.4 Sales/Total assets (x) 0.5 0.5 0.5 0.5 Sales/Net FA (x) 7.1 8.2 10.9 14.4 Working capital/sales (x) 0.8 0.8 0.7 0.7 Working capital days 292.1 285.7 265.9 249.0 Liquidity ratios Current ratio (x) 2.7 2.5 2.5 2.6 Quick ratio (x) 2.3 2.2 2.2 2.2 Interest cover (x) n/a n/a n/a n/a Dividend cover (x) 2.9 0.7 3.3 2.9 Total debt/equity (%) 0.5 0.4 0.4 0.4 Net debt/equity (%) (32.0) (34.3) (36.5) (39.2) Valuation PER (x) 27.2 65.4 18.9 14.8 Price/Book (x) 0.9 0.9 0.9 0.9 Yield (%) 1.3 2.2 1.6 2.4 EV/Net sales (x) 0.7 0.7 0.6 0.5 EV/EBITDA (x) 10.1 13.8 6.7 4.9 EV/EBIT (x) 17.6 31.1 9.4 6.5 Source: Company, PhillipCapital India Research Estimates Page 3 PHILLIPCAPITAL INDIA RESEARCH

Stock Price, Price Target and Rating History 250 200 150 N (TP 240) N (TP 250) N (TP 207) 100 S (TP 105) S (TP 120) S (TP 120) N (TP 135) N (TP 130) N (TP 100) B (TP 103) N (TP 130) 50 N (TP 100) 0 A 15M 15 J 15 A 15 S 15 N 15D 15 F 16M 16M 16 J 16 A 16 S 16 N 16D 16 J 17 M 17A 17 J 17 J 17 S 17 O 17D 17 J 18 M 18A 18 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 4 PHILLIPCAPITAL INDIA RESEARCH

RESEARCH Automobiles Dhawal Doshi Nitesh Sharma, CFA Agro Chemicals Varun Vijayan Banking, NBFCs Manish Agarwalla Pradeep Agrawal, Sujal Kumar Consumer Preeyam Tolia, Vishal Gutka Cement Vaibhav Agarwal Engineering, Capital Goods Jonas Bhutta Vikram Rawat Economics Anjali Verma Raag Haria IT Services Vibhor Singhal Shyamal Dhruve Infrastructure Vibhor Singhal Logistics, Transportation & Midcap Vikram Suryavanshi Media Vishal Gutka Metals Dhawal Doshi Vipul Agrawal Midcaps Deepak Agarwal Akshay Mokashe MANAGEMENT Vineet Bhatnagar (Managing Director) Kinshuk Bharti Tiwari (Head Institutional Equity) Jignesh Shah (Head Equity Derivatives) Pharma & Specialty Chem Surya Patra Mehul Sheth, Rishita Raja Retail & Real Estate Vishal Gutka Dhaval Somaiya Strategy Neeraj Chadawar Telecom Technicals Subodh Gupta, CMT Production Manager Ganesh Deorukhkar Editor Roshan Sony Sr. Manager Equities Support Rosie Ferns SALES & DISTRIBUTION Kishor Binwal Ashvin Patil Bhavin Shah Ashka Gulati Archan Vyas Asia Sales Dhawal Shah Sales Trader Dilesh Doshi Suniil Pandit Execution Mayur Shah CORPORATE COMMUNICATIONS Zarine Damania REGIONAL MEMBER COMPANIES INDIA PhillipCapital (India) Private Limited www.phillipcapital.in SINGAPORE Phillip Securities Pte Ltd www.phillip.com.sg JAPAN Phillip Securities Japan, Ltd www.phillip.co.jp THAILAND Phillip Securities (Thailand) Public Co. Ltd. www.phillip.co.th UNITED STATES Phillip Futures Inc. MALAYSIA Phillip Capital Management Sdn Bhd www.poems.com.my INDONESIA PT Phillip Securities Indonesia www.phillip.co.id FRANCE King & Shaxson Capital Ltd. www.kingandshaxson.com AUSTRALIA PhillipCapital Australia www.phillipcapital.com.au HONG KONG Phillip Securities (HK) Ltd www.phillip.com.hk CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. www.phillip.com.cn UNITED KINGDOM King & Shaxson Ltd. www.kingandshaxson.com SRI LANKA Asha Phillip Securities Limited www.ashaphillip.net/home.htm Page 5 PHILLIPCAPITAL INDIA RESEARCH

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