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Provisions led beat; challenges stay

BHEL reported in line top-line versus consensus, however, managed to report EBITDA/PAT turnaround versus loss expectation. This was led by significant provision reversal and cost focus. For 9M, BHELs top-line stayed lower at ~70% of FY19-20 average levels.

BHEL continues suffering from significant underutilisation, given limited thermal pipeline closure impacting both GMs (competitive pressure) and impact of adverse operating leverage. Management commentary indicated near-term growth impact led by Covid etc., while WC focus reflects an improved receivable position. Overall, we see multiple challenges for BHEL on the conventional business front. Retain REDUCE.

9M results reflect some operational recovery; order intake weak

Although BHEL’s Q3/9M reflects a significant uptick in execution/OPMs on last year’s low base, overall top-line is materially lower versus normal levels (down 30% versus FY19-20 avg.). Flattish salary cost with significant provision reversals/cost reductions helped reduce EBIDTA level losses for the 9M period. New orders for the 9M period at INR194bn implies 2x growth versus last year, but 12% lower versus 9MFY20 levels. Management highlighted a 10%/1% reduction in receivables (including contract assets) versus Q3FY21/FY21 levels, reflecting slower cash recovery. Major impact for Q3 includes net provision of INR(3.2 bn), ex of which BHEL had an EBITDA loss.

Road ahead for BHEL; Key aspects for investors to monitor

Despite leadership in the thermal equipment space, BHEL’s returns trajectory and balance sheet strength has deteriorated sharply, reflecting both significant underutilisation of manufacturing assets and sticky WC challenges. We believe, clarity on thermal awarding, will have little value for investors given an overall dismal sector outlook and shift towards renewables. Noteworthy for investors is if BHEL can expand into newer highly scalable segments like transportation, defence, new energy etc. and its capital allocation going ahead. Conventional business could see some cyclical normalisation, however, bigger re-rating hinge on new areas.

Outlook & Valuation; Structurally challenges; retain REDUCE

BHELs business case in conventional segments will continue to face structural growth issues and re-rating would depend on how well is the company able to transition to sustainable and scalable avenues. We retain REDUCE/SU rating with revised TP of INR 44(vs 40) as we roll forward to Q1FY24E earnings.

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