Published on 22/06/2019 8:55:00 AM | Source: Emkay Global Financial Services Ltd

Option Strategy Bharat Heavy Electricals Ltd by Emkay Global

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Strong margins but order inflows and working capital remain a concern

* BHEL’s Q4FY19 operational performance was above expectations, driven by a better-than-expected EBITDA margin of 13.5%, up 80bps YoY. Revenue, however, was flat at Rs103bn on account of a decline in Power segment revenues.

* FY19 order inflows declined 42% to Rs239bn, with orders for the Power/Industry segments declining 54%/8%. Consequently, the order backlog declined 8% to Rs1.09tn (3.7x FY19 sales), dampening FY20 revenue growth outlook.

* The company is favorably placed in tenders worth Rs240bn, with likely finalization in FY20. Despite BHEL’s focus on the collection of outstanding dues, receivables remain at an elevated level of Rs350bn-380bn (1.2x-1.3x FY19 revenues).

* We raise FY20E EPS by 4%, factoring in higher margin assumptions. We maintain Hold rating on the stock with a TP of Rs80, valuing it at 15x FY21E EPS. The realization of receivables is a key catalyst for the stock to perform despite inexpensive valuations.


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