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Bharat Heavy Electricals’ (BHEL) Q1FY23 revenues grew 61% YoY to Rs46.7bn led by 67% and 52% YoY growth in power and industrial segments, respectively. Raw material ‘cost to sales’ proportion remained elevated at 70% vs 67% in Q1FY22. Improved execution and control over fixed costs helped narrow EBITDA loss to Rs1.7bn from a loss of Rs4.7bn in Q1FY22. Order intake was at Rs25bn, taking the orderbook to ~Rs1trn (4.3x TTM sales). However, as per NTPC’s recent announcements in annual analyst meet, it plans to add 6GW of brownfield thermal capacity. Given the ongoing global energy crisis, we expect NTPC’s capacity addition plans to translate to orders in the near future. We are keenly monitoring pickup in FGD tendering for non-NTPC coal plants as well. We expect pace of execution in the industry segment to accelerate due to increasing backlog and short-cycle nature of orders. Upgrade to BUY (from Add) with a revised target price of Rs76 (previously: Rs59).

* Healthy execution; margin improvement awaited: In Q1FY23, BHEL reported a strong 61% YoY growth in revenues to Rs46.7bn. Power segment grew 67% YoY to Rs35bn while the industrial segment grew 52% YoY to Rs9.2bn. High raw material costs, at 70% of sales, impacted the gross margin. However, strict control over fixed expenses helped narrow PBT loss to Rs2.5bn against loss of Rs5.9bn in Q1FY22.

* Few order wins; green shoots visible: Order inflow in Q1FY23 declined 23% YoY to Rs25bn which typically can be lumpy on quarterly basis. Key order wins for power segment include supply of generator and turbine for Ratle hydro-electric plant. We expect 10GW of hydro-power capacity to be ordered pan-India over next 5-6 years. If pumped storage hydro projects gather pace in the country, it can further add to the opportunities for BHEL. Order intake for industrial segment grew 25% to Rs8.7bn, which included 3- phase propulsion electrics for Kolkata metro and transformers for railways and transmission. Orderbook currently stands at ~Rs1trn (4.3x TTM sales).

* Marginal increase in receivables: Trade receivables declined 4% YoY, but increased 10% QoQ, to Rs70bn despite a 61% YoY rise in revenues. Overall receivables grew 10% YoY and 2% QoQ to Rs339bn which we believe will decline going forward. Trade receivables breakup (including contract assets) is: 42% / 36% / 15% / 7% from states / central PSUs / private / international entities, respectively.

* Upgrade to BUY: Given the ongoing energy crisis, we expect the momentum in execution for power orders to continue as demonstrated in Q1FY23. And, with the recent correction in commodity prices, margins should also gradually expand. This, coupled with BHEL’s efforts to improve cashflow and reduce the receivables, should help build sustainably profitable growth. Risks to our argument include: delay in ordering activity, and any further increase in raw material prices.

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