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Poised for revival

Bharat Heavy Electricals (BHEL) during FY22 witnessed improvement in execution as most covid-related challenges abated. Reduction in fixed costs and reversal of provisions helped EBITDA turn positive at Rs7.4bn. Though the proportion of raw material costs to sales remained elevated at ~72%, we expect the recent softening of commodity prices and higher operating leverage to further enhance profitability. Order intake in FY22 grew 76% YoY to Rs236bn, led by Rs120bn from the nuclear segment. Orderbook as on FY22 stood at ~Rs1trn (4.3x TTM sales). The Central Electricity Authority (CEA) has recently (in the Draft National Electricity Plan) announced coal-based capacity addition of 43GW over the coming decade (25GW of which is under construction and balance is to be awarded soon). This has further strengthened our conviction on the stock as we believe the new coal plants ordering will give BHEL time to ramp up its non-power segments in the coming years. Furthermore, we expect the industrial segment business to accelerate on the back of improved outlook. Maintain BUY with a revised target price of Rs100 (previously: Rs76) as we roll-forward our valuations to FY25E.

* Resurgence in execution and margins: FY22 revenue grew 23% YoY led by revival in execution post a period of covid-related delays. Stringent control over fixed costs and reversal of provisions led to PAT of Rs4bn in FY22 against a loss of Rs27bn in FY21. We expect operational performance to further improve as execution gathers pace and gross margin expands on the back of softening commodity prices.

* Order intake grew on low base: Order inflow in FY22 grew 76% YoY to Rs236bn. Key wins include an EPC and an equipment supply order for NPCIL. Industrial segment order intake grew 32% YoY to Rs56.6bn, led by an all-time high intake from defence (of Rs15bn). Over the years, the company has strengthened its capabilities in the industrial segment and is targeting fast-growing sectors like mobility and defence. Orderbook for FY22 stood at ~Rs1trn (4.3x TTM sales). Henceforth, we expect order intake to gather pace led by revival in thermal capacity addition and management’s sharper focus on the industrial segment.

* Higher cashflow led to reduction in trade receivables: Company’s emphasis on project closures led to improved cashflow, hence receivables. Trade receivables reduced to Rs63bn in FY22 from Rs72bn / Rs127bn in FY21 / FY20. Contract assets however remained elevated resulting in total receivables increasing marginally to Rs331bn.

* Maintain BUY: Given the ongoing energy crisis, we expect execution on power orders to gather pace over the coming quarters. Besides, with the recent correction in commodity prices, margins should also expand gradually. This, coupled with BHEL’s efforts to improve cashflow and reduce receivables, should help build sustainable growth in profitability, in our view. Risks to our argument include: delay in ordering activity, and any further increase in raw material prices.

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