(BHEL IN) Rating: REDUCE CMP: Rs72 TP: Rs73 July 25, 2018 Q1FY19 Result Update Change in Estimates Target Reco Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating REDUCE REDUCE Target Price 73 90 Sales (Rs. m) 3,29,103 3,78,468 3,29,103 3,78,468 % Chng. - - EBITDA (Rs. m) 23,399 31,815 23,399 31,815 % Chng. - - EPS (Rs.) 4.1 5.6 4.1 5.6 % Chng. - - Key Financials FY17 FY18 FY19E FY20E Sales (Rs. bn) 284 289 329 378 EBITDA (Rs. bn) 11 19 23 32 Margin (%) 3.7 6.7 7.1 8.4 PAT (Rs. bn) 5 7 15 21 EPS (Rs.) 1.9 2.0 4.1 5.6 Gr. (%) (159.4) 3.3 107.5 37.7 DPS (Rs.) - - - - Yield (%) - - - - RoE (%) 1.4 2.2 4.6 6.1 RoCE (%) 0.7 3.5 6.0 8.2 EV/Sales (x) 0.3 0.5 0.5 0.4 EV/EBITDA (x) 6.7 7.8 7.2 4.9 PE (x) 37.6 36.4 17.5 12.7 P/BV (x) 0.5 0.8 0.8 0.8 Key Data BHEL.BO BHEL IN 52-W High / Low Rs.108 / Rs.64 Sensex / Nifty 36,858 / 11,132 Market Cap Rs.263bn/ $ 3,828m Shares Outstanding 3,671m 3M Avg. Daily Value Rs.1215.53m Shareholding Pattern (%) Promoter s 63.06 Foreign 13.04 Domestic Institution 18.16 Public & Others 5.74 Promoter Pledge (Rs bn) - Stock Performance (%) 1M 6M 12M Absolute (2.3) (30.4) (26.2) Relative (6.0) (32.0) (35.5) Kunal Sheth kunalsheth@plindia.com 91-22-66322257 Shreyans Jain shreyansjain@plindia.com 91-22-66322256 Structural story remains weak Margin beat was led by gross margin improvement and forex gain: Sales for the quarter was up 7.8% YoY to Rs59.3bn was slightly below our estimates (PLe Rs60.5bn). The sales from power segment were up 6.9% YoY to Rs46.3bn and sales for industry segment were up 11% YoY to Rs4.8bn. Gross margins were up 310bps YoY led by cost control measures, design optimization and better sourcing. Other expenses decreased by 3% YoY to Rs8.6bn led by forex gains leading to BHEL reporting an EBITDA of Rs2.8bn (Vs loss of Rs883mn) and EBITDA margins of 4.8% (PLe: 1.9%). Adj. PAT stood at Rs1.5bn, up 92% YoY (PLe: Rs172mn). Slow-moving backlog on a decline: BHEL reported order inflow of ~Rs43.7bn for the quarter, up 2.5x YoY and order book stood at R1.17tn (up 10% YoY). Of the total order book, ~Rs190bn of orders are slow moving (was Rs194bn for Q4). Out of Rs 190bn of slow moving orders ~Rs50bn orders are such where zero date is yet to start and ~Rs60bn order are such which are likely to be cancelled ( Nashik-II/Amaravati-II and Visa power) Major orders won in the first quarter of FY2018-19 include two significant orders for emission control equipment from Telangana State Power Generation Corporation Ltd (TSGENCO), involving supply and installation of Flue Gas Desulphurization (FGD) systems for control of SOx emissions at TSGENCO's 1x800 MW Kothagudem Thermal Power Station (TPS) and 4x270 MW Bhadradri TPS in Telangana Key highlights from conference call: 1) BHEL expects market size of 8-10GW per annum (excluding FGD orders) 2) Total emission norm related opportunity Rs 1tn. FGD orders where BHEL is/will bid is Rs 370bn (57 units). 3) BHEL favorable placed in orders worth Rs170bn (Rs 140bn in power/ Rs13bn in industry/ Rs 16bn international markets). 4) Provision increased YoY to Rs 3.09bn from 2.09bn largely due to provision made for one private sector order (Rs 800mn). 5) Expect RM to be ~60% of sales. 6) BHEL won various orders in the Transportation, Defence, Aerospace and Water segment, reiterating the company s focus on increasing non-coal business. Outlook and Valuation: The stock is trading at 12.7x FY20E earnings. We do not see any change in our outlook on BHEL as it continues to be weak due to deterioration in margin profile, aggressive pricing in orders and risk of write-offs from stranded projects. We believe power equipment demand is likely to be muted, given the low PLF of current capacities and large under construction capacities. Execution is likely to bounce back in the near term due to reduction of slow-moving backlog; however, structural story still remains weak. We maintain Reduce on the stock with TP of Rs73. July 25, 2018
Exhibit 1: Q1FY19 Result Overview (Rs m)f Y/e March Q1FY19 Q1FY18 YoY gr. (%) Q4FY18 FY19E FY18 YoY gr. (%) Net Sales 59,355 55,056 7.8 1,01,470 3,29,103 2,89,257 13.8 Expenditure Raw Material 33,677 32,954 2.2 51,289 2,03,944 1,61,435 26.3 % of Net Sales 56.7 59.9 50.5 62.0 55.8 Gross margin (%) 43.3 40.1 49.5 38.0 44.2 Personnel Cost 14,180 14,088 0.7 18,805 63,706 60,265 5.7 % of Net Sales 23.9 25.6 18.5 19.4 20.8 Others 8,626 8,897 (3.0) 19,060 38,054 48,229 (21.1) % of Net Sales 14.5 16.2 18.8 11.6 16.7 Total Expenditure 56,483 55,939 1.0 89,154 3,05,704 2,69,928 13.3 EBITDA 2,872 (883) (425.4) 12,316 23,399 19,329 21.1 Margin (%) 4.8 (1.6) 12.1 7.1 6.7 Other income 1,786 4,622 (61.4) 1,979 7,624 6,931 10.0 Depreciation 1,761 2,001 (12.0) 2,171 3,753 7,864 (52.3) EBIT 2,897 1,738 66.8 12,125 27,269 18,395 48.2 Interest 639 657 (2.8) 726 3,450 2,546 35.5 PBT 2,258 1,080 109.1 11,399 23,819 15,850 50.3 Total Taxes 703 272 158.3 6,827 8,813 7,784 13.2 ETR (%) 31.1 25.2 59.9 37.0 49.1 PAT 1,556 808 92.5 4,572 15,006 8,066 86.0 Source: Company, PL July 25, 2018 2
Financials Income Statement (Rs m) Y/e Mar FY17 FY18 FY19E FY20E Net Revenues 2,84,470 2,89,257 3,29,103 3,78,468 YoY gr. (%) 11.6 1.7 13.8 15.0 Cost of Goods Sold 1,71,100 1,61,435 2,03,944 2,34,536 Gross Profit 1,13,371 1,27,822 1,25,158 1,43,932 Margin (%) 39.9 44.2 38.0 38.0 Employee Cost 53,946 60,265 63,706 69,468 Other Expenses 48,811 48,229 38,054 42,649 EBITDA 10,614 19,329 23,399 31,815 YoY gr. (%) (177.7) 82.1 21.1 36.0 Margin (%) 3.7 6.7 7.1 8.4 Depreciation and Amortization 8,488 7,864 3,753 3,948 Balance Sheet Abstract (Rs m) Y/e Mar FY17 FY18 FY19E FY20E Non-Current Assets Gross Block 52,792 55,386 58,658 61,658 Tangibles 51,744 54,473 57,744 60,744 Intangibles 1,048 913 913 913 Acc: Dep / Amortization 16,833 24,697 28,451 32,399 Tangibles 16,833 24,697 28,451 32,399 Intangibles - - - - Net fixed assets 35,959 30,688 30,207 29,259 Tangibles 34,911 29,775 29,294 28,345 Intangibles 1,048 913 913 913 EBIT 2,125 11,465 19,645 27,866 Margin (%) 0.7 4.0 6.0 7.4 Net Interest 3,506 2,546 3,450 3,450 Other Income 7,659 6,931 7,624 8,386 Capital Work In Progress 1,683 2,028 2,028 2,028 Goodwill - - - - Non-Current Investments 7,396 7,966 12,344 13,584 Net Deferred tax assets 38,414 36,259 36,259 36,259 Other Non-Current Assets 2,033 - - - Profit Before Tax 6,278 15,850 23,819 32,802 Margin (%) 2.2 5.5 7.2 8.7 Total Tax 1,320 7,784 8,813 12,137 Effective tax rate (%) 21.0 49.1 37.0 37.0 Profit after tax 4,959 8,066 15,006 20,665 Minority interest - - - - Share Profit from Associate - - - - Adjusted PAT 4,669 7,233 15,006 20,665 YoY gr. (%) (159.4) 54.9 107.5 37.7 Margin (%) 1.6 2.5 4.6 5.5 Extra Ord. Income / (Exp) - - - - Reported PAT 4,669 7,233 15,006 20,665 YoY gr. (%) (159.4) 54.9 107.5 37.7 Margin (%) 1.6 2.5 4.6 5.5 Other Comprehensive Income - - - - Total Comprehensive Income 4,669 7,233 15,006 20,665 Equity Shares O/s (m) 2,448 3,671 3,671 3,671 EPS (Rs) 1.9 2.0 4.1 5.6 Current Assets Investments - - - - Inventories 73,724 62,588 1,18,968 1,36,813 Trade receivables 3,18,633 3,54,935 2,92,536 3,36,416 Cash & Bank Balance 1,04,918 1,12,912 95,287 1,08,202 Other Current Assets 25,984 25,692 36,201 45,416 Total Assets 6,12,302 6,37,892 6,46,317 7,33,838 Equity Equity Share Capital 4,895 7,343 7,343 7,343 Other Equity 3,18,049 3,18,668 3,25,008 3,36,126 Total Networth 3,22,944 3,26,011 3,32,351 3,43,469 Non-Current Liabilities Long Term borrowings 896 572 572 572 Provisions 50,014 26,118 21,300 24,538 Other non current liabilities 29,834 33,641 1,05,000 1,50,000 Current Liabilities ST Debt / Current of LT Debt - - - - Trade payables 93,403 1,10,659 67,624 77,767 Other current liabilities 1,14,165 1,39,747 1,15,521 1,32,950 Total Equity & Liabilities 6,12,302 6,37,892 6,46,317 7,33,838 July 25, 2018 3
Cash Flow (Rs m) Y/e Mar FY17 FY18 FY19E FY20E Key Financial Metrics Year Y/e Mar FY17 FY18 FY19E FY20E PBT 6,278 15,850 23,819 32,802 Per Share(Rs) Add. Depreciation 8,488 7,864 3,753 3,948 EPS 1.9 2.0 4.1 5.6 Add. Interest 3,506 2,546 3,450 3,450 CEPS 5.4 4.1 5.1 6.7 Less Financial Other Income 7,659 6,931 7,624 8,386 BVPS 131.9 88.8 90.5 93.6 Add. Other 7,132 (6,931) (7,624) (8,386) FCF 0.8 1.9 (3.1) 5.1 Op. profit before WC changes 25,405 19,329 23,399 31,815 DPS - - - - Net Changes-WC (13,895) (1,537) (23,947) 1,349 Return Ratio(%) Direct tax (5,889) (7,784) (7,384) (11,598) RoCE 0.7 3.5 6.0 8.2 Net cash from Op. activities 5,620 10,008 (7,932) 21,566 ROIC 0.8 2.7 5.3 7.6 Capital expenditures (3,359) (3,078) (3,272) (3,000) RoE 1.4 2.2 4.6 6.1 Interest / Dividend Income 6,495 6,931 7,624 8,386 Balance Sheet Others - (293) (1,106) (825) Net Debt : Equity (x) (0.3) (0.3) (0.3) (0.3) Net Cash from Invt. activities 3,136 3,559 3,246 4,561 Net Working Capital (Days) 384 387 381 381 Issue of share cap. / premium - - - - Valuation(x) Debt changes (526) (324) - - PER 37.6 36.4 17.5 12.7 Dividend paid (3,537) (7,718) (8,666) (9,547) P/B 0.5 0.8 0.8 0.8 Interest paid (636) (2,546) (3,450) (3,450) P/CEPS 5.4 4.1 5.1 6.7 Others - - - - EV/EBITDA 6.7 7.8 7.2 4.9 Net cash from Fin. activities (4,699) (10,587) (12,116) (12,997) EV/Sales 0.3 0.5 0.5 0.4 Net change in cash 4,058 2,980 (16,802) 13,129 Dividend Yield (%) - - - - Free Cash Flow 2,064 6,930 (11,204) 18,566 Quarterly Financials (Rs m) Y/e Mar Q2FY18 Q3FY18 Q4FY18 Q1FY19 Net Revenue 62,971 66,264 1,01,470 59,355 YoY gr. (%) - - 4.7 7.8 Raw Material Expenses 38,252 38,940 51,289 33,677 Gross Profit 24,719 27,324 50,181 25,678 Margin (%) 39.3 41.2 49.5 43.3 EBITDA (954) 2,954 12,316 2,872 YoY gr. (%) 8.1 (409.7) 316.9 (76.7) Margin (%) (1.5) 4.5 12.1 4.8 Depreciation / Depletion 1,872 1,820 2,171 1,761 EBIT (2,826) 1,134 10,145 1,111 Margin (%) (4.5) 1.7 10.0 1.9 Net Interest 552 610 726 639 Other Income 4,850 1,375 1,979 1,786 Profit before Tax 1,473 1,898 11,399 2,258 Margin (%) 2.3 2.9 11.2 3.8 Total Tax 318 367 6,827 703 Effective tax rate (%) 21.6 19.3 59.9 31.1 Profit after Tax 1,154 1,532 4,572 1,556 Minority interest - - - - Share Profit from Associates - - - - Adjusted PAT 1,154 1,532 4,572 1,556 YoY gr. (%) - - 112.1 92.5 Margin (%) 1.8 2.3 4.5 2.6 Extra Ord. Income / (Exp) - - - - Reported PAT 1,154 1,532 4,572 1,556 YoY gr. (%) - - 112.1 92.5 Margin (%) 1.8 2.3 4.5 2.6 Other Comprehensive Income 27 27 753 - Total Comprehensive Income 1,181 1,559 5,325 1,556 Avg. Shares O/s (m) - - - - EPS (Rs) - - - - July 25, 2018 4
Price Chart Recommendation History (Rs) 200 165 130 95 61 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 No. Date Rating TP (Rs.) Share Price (Rs.) 1 10-Aug-17 Reduce 125 126 2 09-Oct-17 Reduce 125 85 3 07-Nov-17 Reduce 81 93 4 10-Jan-18 Reduce 81 101 5 08-Feb-18 Reduce 89 95 6 13-Apr-18 Reduce 89 88 7 30-May-18 Reduce 90 84 8 11-Jun-18 Reduce 90 93 9 10-Jul-18 Reduce 90 70 PL s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly July 25, 2018 5
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Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 www.plindia.com Bloomberg Research Page: PRLD <GO> July 25, 2018 6