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Sharp recovery in topline; margins remain weak

BHEL, a government owned entity, is India’s largest engineering company and dominates the supply of equipment for power plants in India. Key products include gas turbines, generators, thermal sets, diesel shunters, turbo / hydro sets, transformers, switch gears, circuit breakers and boilers.

* In Q4FY21, standalone revenue rose 47.0% YoY to Rs. 6,752cr primarily driven by improvement in industrial activity.

* EBITDA loss for Q4FY21 was reported at Rs. 1,264cr (vs loss of Rs. 562cr in Q4FY20) due to increase in other expenses whereas Net loss stood at Rs. 1,033cr against Rs. 1,534cr loss in prior year period.

* Capex push from government enabling infra led demand recovery coupled with sharp improvement in manufacturing sector could drive the business in the near term subject to COVID related uncertainties. Also, cost control and recovery in operating margins are to be under focus. Hence, we downgrade our rating on the stock to REDUCE with a revised target price of Rs. 62 based on 23x FY23E adj. EPS

Robust revenue growth; Healthy order book

BHEL’S Q4FY21 standalone revenue grew 47.0% YoY to Rs. 6,752cr (vs. Rs. 4,594cr in Q4FY20). Improvement in business sentiments, supported by increased capex push from the Government led to both of its business segments delivering strong revenue growth during the quarter. Industry segment’s revenue rose 38.4% YoY to Rs. 1,963cr whereas power segment increased by 50.9% YoY. Company bagged various prominent orders, including one in a new growth area - Downstream Oil & Gas EPC. Overall total order book stood at Rs. 1,02,090cr as on 31st March, 2021.

Margins impacted due to increase in provisions

Gross Profit in Q4FY21 stood at Rs. 1,806cr (vs Rs. 1,026cr in Q4FY20) with gross margin at 26.8%. During Q4FY21, company’s EBITDA loss was reported at Rs. 1,264cr against Rs. 562cr loss in Q4FY20. The increase in losses was primarily due to significant rise in provisions during Q4FY21. However, on account of deferred tax benefits, net loss contracted to Rs. 1033cr in Q4FY21 compared to loss of Rs. 1,534cr in Q4FY20.

Key concall highlights

* BHEL is placed as L1 bidder for NPCIL tender (of approximately Rs. 10,800cr), retaining its market leadership in nuclear steam turbines business.

* Thermal sets manufactured by BHEL demonstrated excellence in Operating Availability (OA) and Plant Load Factor (PLF) metrics thereby contributing to 55.5% of India’s total thermal power generation.

* Company received its first-ever LSTK order in Downstream Oil & Gas from IOCL. Also, received order for 650 MT Fractionator column from HRRL.

* Filing 526 patents/ copyrights in FY21, BHEL invested Rs. 725cr on R&D during this fiscal.

Valuation

Considering the cost increases and other headwinds are expected to fade away in the coming quarters, the business should continue to maintain its topline growth, with expected gradual improvements in profit margins. However, risks of resurgence in COVID cases and subsequent partial lockdowns could potentially impact company operations which is to be closely monitored. Lastly, considering the recent rally in the stock price, along with a cautious view, we downgrade our rating on the stock to REDUCE with a revised TP of Rs. 62 based on 23x FY23E adj. EPS.

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