Challenging environment;working capital stress
Bharat Heavy Electricals (BHEL) witnessed 51% YoY drop in revenuesto Rs50.5bnimplying continued weak execution. Company reported EBITDA loss of Rs5.6bn as material costsincreased 1,400bps YoY to 71.2%and staff costswere up 4% YoY at Rs11.1bn. However, other expenditure was 55% YoY lower due to provision withdrawal and this partially mitigated losses.Some large projects, in which BHEL is L1 for long, are getting further delayed in terms of finalisation. Receivables continuedto be high at Rs365bnand execution headwinds will likely impact near to medium term growth.Given subdued growth, we cut our earnings estimates by 59% and 6.5% for FY21E and FY22E respectively and downgrade the stock to REDUCE (from Hold) with a revisedtarget price of Rs27(previously: Rs24).
* Execution impacted by lockdown;expected to be weak in nearto medium term:Overall execution was weak in Q4FY20 due tolockdown(company estimates~Rs40bn hit on revenues). In addition to the domestic lockdown, execution was impacted also due to delay in imports from Europe and other geographies. We expect execution weakness to continue in the near to mediumterm.
* Delay in order finalisation indicateslack of urgency at client-end: BHEL is L1 in NTPC Talcher 2x 660MW and some FGD and boiler modification orders. Itis also hopeful of finalisation of orders from SCCL Adilabad (1x 800MW), NLC Talabira, NTPC Lara, NTPC Singrauli,and orders from Nuclear Power Corporation. Order intake declined 5% YoY to Rs63bn inQ4FY20 and 1.3%YoYto Rs235bn inFY20;current orderbook stands at Rs1.1trn (5.3xTTM sales).
* High receivables impacting working capital: Debtors remained high at Rs365bn in Mar’20vsRs386bn in Mar’19.Delay in collection from certain SEBshas been a major impediment to growth.While trade receivables declined 22% YoY to Rs124bn, contract assetsat Rs241bn remained highand increased 5.5% YoY.Retention money has increased 5.3% YoY to Rs157bn largely due to client reluctance to pursueperformance guarantee testsafter COD(Dateof commissioning)at sites.
* Downgrade to REDUCE:Given the execution challenges, we cut our earnings estimates by 59% and 6.5% for FY21E and FY22E respectively. Due to depressed earnings in FY21E because oflockdown, we value the stock on FY22E earnings with target P/E multiple of 8x versus one-year forward multiple of 11x earlier.Due to the challenging environment,we downgradethe stockto REDUCE(from Hold) with a revisedtarget price ofRs27(earlier: Rs24).
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