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Execution disappointing; Outlook weakening further
Slow-moving orders cast doubts over execution
* BHEL’s 3QFY20 earnings continue to disappoint due to 23% YoY revenue decline as its two key projects are on hold (Yadadri and Udangudi). Due to forex gains and reversal of provisions, better margins are offsetting part of the revenue miss. But, operating performance was below expectations. BHEL’s management has refrained from providing any revenue guidance as its focus has shifted to cash-flow management; the company has INR380b of pending receivables, which has hardly moved over the last few years.
* We cut our earnings estimates by 9-13% over FY20-22E to account for poor execution and the weak ordering environment. While orders are few to come by, the pricing environment continues to be very competitive, limiting scope for margin expansion. Maintain Neutral with a lower TP of INR40.
Tepid performance as execution disappoints
* 3QFY20 revenues were down 22.6% to INR56.8b and missed our estimates by 27%. Gross margins deteriorated to 36.6% (-100bp YoY) indicating poor pricing of the current order book as BHEL has been aggressive in wining these orders. EBITDA margin expanded to 5.8% (+280bp YoY) and was better than our est. 4.5% owing to forex income of INR1.4b and reversal of provisions. Interest expense increased to INR1.4b while other income was down 33% to INR1.5b in absence of any cash-flow generation. Overall, adj. PAT declined 17% YoY to INR1.6b and was 11% below expectations.
* Segment highlights: (a) Power segment: Revenue declined 26% YoY to INR40.7b. PBIT margin shrank 10bp YoY to 10.6%. (b) Industry segment: Revenue declined 14% YoY to INR13.9b. PBIT margins expanded 200bp YoY to 5.5%.
* Order book stood at INR1.07t; of this, executable order book stood at INR875b.
Key takeaways from management commentary
* Execution was tepid owing to lower order book and delays in executions, especially Yadadri and Udangudi as clients had put orders on hold.
* Near-term ordering pipeline includes Lara, Singrauli and Talcher, as well as opportunities in the FGD side. The company is L1 in Talcher order worth INR63b as well as FGD orders worth INR42b.
* Total receivables continue to be elevated at INR380b, of which 12% is from the private sector, 48% is from state entities, 31% is from the Center and 9% is related to international market.
Valuation and view
* We cut our earnings estimates by 9-13% over FY20-22E to account for poor execution and the weak ordering environment. While orders are few to come by, the pricing environment continues to be very competitive limiting the scope for margin expansion. Maintain Neutral with lower TP of INR40 (15x FY21E EPS). There exist downside risks to our estimates in case the company fails to win few orders from the power segment, which may come up for bidding in the near term.
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