Published on 10/07/2020 9:16:53 AM | Source: ICICI Securities Ltd

Reduce Bharat Heavy Electricals Ltd For The Target Rs. 27 - ICICI Securities

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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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